the courage to INNOVATE

2010 annual report WHO WE ARE WHAT’S INSIDE

TELUS is a leading national telecommunications CORPORATE REVIEW company in Canada, with $9.8 billion of annual revenue what we offer gatefold and 12.3 million customer connections including 2010 financial and operating highlights gatefold 7.0 million wireless subscribers, 3.7 million wireline TELUS at a glance 1 network access lines, 1.2 million Internet subscribers CEO letter to investors 2 and more than 300,000 TELUS TV® customers. TELUS review of operations 10 provides a wide range of communications products 2010 scorecard and 2011 targets 14 and services including data, Internet protocol (IP), voice, community investment 16 entertainment and video. In support of our philosophy questions and answers 18 to give where we live, TELUS, our team members board of directors and executive leadership team 22 and retirees have contributed $211 million to charitable where we are 25 and not-for-profit organizations and volunteered FINANCIAL REVIEW 26 3.7 million hours to local communities since 2000. CFO letter to investors 27 corporate governance 30 OUR VALUES financial and operating statistics 32 management’s discussion and analysis 38 .. We embrace change and initiate opportunity consolidated financial statements and notes 113 .. We have a passion for growth glossary 170 .. We believe in spirited teamwork investor information 172 .. We have the courage to innovate corporate social responsibility back cover

LIONS JOIN OUR FAMILY At TELUS, we use nature-based imagery to help us communicate our services in a way that is simple and easy to understand. In the next step of our spirited journey, our lion plays a leading role in this year’s THIS AREA TRIMS OFF annual report. What better critter to demonstrate the courage shown by the TELUS team in our relentless pursuit of innovation.

2006 2007 2008 2009

Caution regarding forward-looking statements summary This document contains statements about expected future events and financial and operating performance of TELUS that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the assumptions, predictions and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward- looking statements as a number of factors could cause assumptions, actual future performance and events to differ materially from those expressed in the forward-looking statements. Accordingly this document is subject to the disclaimer and qualified in its entirety by the assumptions (including assumptions for 2011 targets), qualifications and risk factors referred to in Management’s discussion and analysis starting on page 38 of this annual report and in other TELUS public disclosure documents and filings with securities commissions in Canada (on SEDAR at sedar.com) and in the United States (on EDGAR at sec.gov). TELUS disclaims any intention or obligation to update or revise forward-looking statements, except as required by law, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance.

All financial information is reported in Canadian dollars unless otherwise specified.

Copyright © 2011 TELUS Corporation. All rights reserved. Certain products and services named in this report are trademarks. The symbols ™ and ® indicate those owned by TELUS Corporation or its subsidiaries. All other trademarks are the property of their respective owners. WHAT WE OFFER

WIRELESS We provide integrated digital wireless voice and data services on our nationwide wireless networks. We are unique in the Canadian market as we operate Canada’s fastest* coast-to-coast HSPA+ network, as well as CDMA and Mike® iDEN network technologies. TELUS offers customers the widest choice of wireless solutions to best meet their needs.

Digital voice: Postpaid, Pay & Talk® prepaid and Mike all-in-one services including TELUS Push to Talk®, which cover 99% of Canadians, with international roaming to more than 200 countries Data: Web browsing, social networking, text, picture, video and instant messaging, images, ringtones, TELUS mobile TV®, video on demand, TELUS mobile radio®, downloadable music and the latest wireless mobile applications Devices: Leading smartphones, mobile Internet keys and tablets; and TELUS Smart Hub mobile Wi-Fi providing Internet access and simultaneous voice service.

*Based on TELUS’ tests of data throughput speeds in large Canadian urban centres available from national high-speed packet access plus (HSPA+) service providers. Limitations apply. See the term “fastest” in the Glossary for details. WIRELINE We are a full-service incumbent local exchange carrier in B.C., Alberta and Eastern Quebec offering a wide range of telecommunications products to consumers including residential phone, Internet access and television and entertainment services. Nationally, we provide communications and IT solutions for businesses including IP, voice, video, data and managed solutions. THIS AREA TRIMS OFF Voice: Reliable phone service with long distance and call files and applications with critical applications stored in TELUS’ management services intelligent Internet Data Centres Internet: Secure Optik High SpeedTM Internet access service Healthcare: TELUS Health Solutions provides claims manage- with a comprehensive suite of security solutions ment solutions, hospital-to-home technology, patient records TELUS TV: High-definition (HD) entertainment service featuring at the point of care, and access to essential drug and medical personal video recording (PVR), HD Video on Demand and information through information communication technology. Pay Per View services with Optik TVTM and TELUS Satellite TV®; Optik TV also offers PVR Anywhere, Remote Recording and use of Xbox 360 as a set-top box IP networks and applications: Leading-edge IP networks that offer converged voice, video, data or Internet access on a secure, high-performing network Conferencing and collaboration: Full range of equipment and application solutions to support meetings using phone, video and the Internet Contact centre and outsourcing solutions: Managed solu- tions providing secure, stable, low-cost and scalable infrastructure. TELUS International is a leading provider with sophisticated centres in North America, Central America and Asia Hosting and managed IT: Ongoing assured availability of telecommunications, networks, servers, databases, 2010 FINANCIAL AND OPERATING HIGHLIGHTS

% change % change ($ in millions except per share amounts) 2010 2009 2010 to 2009 2008 2010 to 2008 Income Operating revenues $ß 9,779 $ß 9,606 1.8 $ß 9,653 1.3 EBITDA1 $ß 3,643 $ß 3,491 4.4 $ß 3,779 (3.6) Operating income $ß 1,908 $ß 1,769 7.9 $ß 2,066 (7.6) Net income attributable to common and non-voting shares $ß 1,034 $ 998 3.6 $ß 1,128 (8.3) Earnings per share (EPS) – basic $ß 3.23 $ß 3.14 2.9 $ß 3.52 (8.2) EPS – basic, as adjusted2 $ß 3.26 $ß 2.84 14.8 $ß 3.39 (3.8) Dividends declared per share $ß 2.00 $ß 1.90 5.3 $ß 1.825 9.6

Dividend payout ratio (%)3 65 61 – 54 – Financial position Total assets $ß19,599 $ß19,219 2.0 $ß19,021 3.0 Net debt4 $ß 6,869 $ß 7,312 (6.1) $ß 7,286 (5.7) Owners’ equity $ß 8,201 $ß 7,575 8.3 $ß 7,108 15.4

Return on common equity (%) 13.1 13.4 – 16.0 – Market capitalization of equity5 $ß14,332 $ß10,642 34.7 $ß11,483 24.8 Liquidity and capital resources Cash from operations $ß 2,546 $ß 2,904 (12.3) $ß 2,819 (9.7) Capital expenditures $ß 1,721 $ß 2,103 (18.2) $ß 1,859 (7.4) Payment for wireless spectrum $ – $ – – $ 882 – Free cash flow (before dividends)6 $ 947 $ 485 95.3 $ 361 162.3 Net debt to EBITDA ratio7 1.8 2.0 – 1.9 – Customer connections (as at December 31)

Wireless subscribers (000s) 6,971 6,524 6.9 6,129 13.7

Network access lines (000s)8 3,739 3,966 (5.7) 4,176 (10.5)

Internet subscribers (000s) 1,229 1,215 1.2 1,220 0.7

TV subscribers (000s)9 314 170 84.7 78 302.6

Total customer connections (000s) 12,253 11,875 3.2 11,603 5.6

1 Earnings before interest, taxes, depreciation and amortization, calculated as Operating revenues less Operations expense and Restructuring costs. 2 Excludes positive income tax-related adjustments of nine cents per share in 2010, 52 cents per share in 2009 and 13 cents per share in 2008, offset by debt redemption losses of 12 cents per share in 2010 and 22 cents per share in 2009. 3 Last quarterly dividend declared per share, in the respective reporting period, annualized, divided by the sum of Basic earnings per share reported in the most recent four quarters. 4 The summation of Long-term debt excluding unamortized debt issuance cost, current maturities of Long-term debt, net deferred hedging liability related to U.S. dollar Notes, and proceeds from securitized accounts receivable, less Cash and temporary investments. 5 Market value based on year-end closing share prices and shares outstanding. 6 EBITDA as reported, deducting donations expense and securitization fees, adjusted for payments in excess of expense for share-based compensation, restructuring initiatives and defined benefit plans, and deducting cash interest, cash income tax, capital expenditures and payment for wireless spectrum. 7 Net debt to EBITDA, where EBITDA excludes Restructuring costs. 8 Historical Network access lines updated for 2009 and 2008 to reflect prior period reporting adjustments. 9 TV subscribers consists of TELUS Optik TV and TELUS Satellite TV. Note: Certain comparative information has been restated to conform to the 2010 presentation. AT A GLANCE

2010 PERFORMANCE LIQUIDITY AND CUSTOMER INCOME CAPITAL RESOURCES CONNECTIONS

Operating revenues (billions) Cash from operations (billions) Wireless subscribers (000s) 2010: $9.8 2010: $2.5 2010: 6,971 2009: $9.6 1.8% 2009: $2.9 12% 2009: 6,524 6.9%

EBITDA (billions) Capital expenditures (billions) Network access lines (000s) 2010: $3.6 2010: $1.7 2010: 3,739 2009: $3.5 4.4% 2009: $2.1 18% 2009: 3,966 5.7%

Earnings per share Free cash flow (millions) Internet subscribers (000s) 2010: $3.23 2010: $947 2010: 1,229 2009: $3.14 2.9% 2009: $485 95% 2009: 1,215 1.2%

Dividends declared (per share) Net debt to EBITDA ratio TV subscribers (000s) 2010: $2.00 2010: 1.8 times 2010: 314 2009: $1.90 5.3% 2009: 2.0 times 0.2 2009: 170 85%

WHY INVEST IN TELUS? TELUS is creating value by:

.. Successfully implementing a .. Delivering a superior home .. Increasing the prospective dividend consistent decade-long strategy entertainment experience through payout ratio guideline and raising focused on national wireless and Optik TV and High Speed Internet, the dividend twice in 2010, consistent data growth led by an experienced while also enhancing TELUS’ with our dividend growth model leadership team bundling capabilities .. Adhering to financial policies to .. Continuing to leverage our advanced .. Generating increased free cash maintain strong investment grade wireless network and future friendly® flow by realizing a return on recent credit ratings customer approach to enhance our significant capital investments, .. Providing transparent, award-winning competitive position and generate increasing earnings and lowering financial disclosure and corporate profitable growth interest costs and cash taxes governance practices.

TELUS 2010 annual report . 1 CEO letter to investors

the courage to INNOVATE

Dear investor, 2010 was a year of building momentum that positions TELUS for even stronger performance in 2011. We are realizing the benefi ts of our major strategic investments. Our relentless pursuit of innovation is creating positive differences for customers, providing competitive advantages, generating value for our stakeholders and standing us in good stead for the future. Delivering success

One year ago, I wrote that 2010 was a great opportunity for improved performance and growth at TELUS. Our decisions to pursue wireless and wireline broadband investments and inno vative new services required courage as they were made during the 2009 recession, at a time when many companies were reducing capital expenditures. These strategic investments strengthened our competitive position and helped attract new customers. Accordingly, we generated strong performance in 2010, and our 2011 targets show that we expect the trend to continue. TELUS’ consistent strategy, growth-oriented asset mix, high- performing team and commitment to operational excellence were evidenced by the company’s improved financial performance in To fulfill our philosophy to give where we live, TELUS is a 2010. This helped drive a 33 per cent increase in share price passionate supporter of many sponsorship events across Canada, and allowed us to deliver two dividend increases to shareholders such as the World Police & Fire Games, at which Darren Entwistle last year. In 2010, TELUS provided an excellent total shareholder is pictured above, and the TELUS World Skins Game. return of 40 per cent. By comparison, the Toronto Stock Exchange provided a return of 18 per cent. Notably, over the past 11 years, TELUS has delivered the highest cumulative total shareholder accompanied by further j-curve earnings dilution from introductory return among global incumbent telcos. promotions offered to customers. This is typical of the successful ramping-up phase of a fast-growing business and reminds me 2010 highlights of our experience in wireless a decade ago. Financial results and 2011 outlook Consolidated revenue and earnings growth resumed in 2010. Growth was primarily driven by increases in the number of Operational results customer connections, the improving trend in wireless revenue TELUS’ sizeable investments in wireless and wireline broadband per customer and the benefits of ongoing operational efficiency network expansions set the stage for improved operational initiatives. Revenue grew by two per cent, operating earnings performance in 2010. (earnings before interest, taxes, depreciation and amortization or On the wireless side, revenue growth resumed, up seven EBITDA) by four per cent and earnings per share (EPS) by three per cent, based on an increase in our customer base of seven per cent. Adjusted for non-operating items, underlying EPS per cent and a much improved trend in average revenue per growth was 15 per cent. customer, which was down only one per cent compared to Particularly noteworthy for investors was the upswing in a seven per cent decline in 2009. With Canada’s fastest* coast- free cash flow in 2010, up by 95 per cent to $947 million due to to-coast HSPA+ wireless network, Clear & Simple® rate plans improved operating earnings and reduced capital expenditures. and a wide array of compelling devices, we experienced The strong cash flow position and prospects for continued tremendous growth in smartphone loading, a trend we expect earnings growth allowed us to increase the dividend by 10.5 per to continue through 2011. cent last year to a record high of $2.10 on an annual basis. On the wireline side, we launched the OptikTM brand with Notably, TELUS has delivered seven dividend increases to share- Microsoft Mediaroom, a revolutionary new suite of advanced holders in as many years. The amount of dividends has tripled IP-based entertainment services for the home. The launch from $210 million in 2003 to $642 million in 2010. sparked a tremendous acceleration in TV subscriptions, with TELUS has considerable financial strength and a decade- the customer base growing by 85 per cent to 314,000 in 2010. long track record of considering the interests of debt and This growth in Optik TV, combined with our ongoing operational equity holders by adhering to consistent financial guidelines. efficiency efforts, is helping to offset the decline in revenues As a result, TELUS has been able to readily access the capital and operating earnings from our legacy services. We are again markets and in mid-2010 completed a successful $1 billion expecting strong TV net additions in 2011, which will likely be debt refinancing that will reduce future interest expenses.

TELUS 2010 annual report . 3 DRIVEN TO Enterprise value

EXCEL 2010: $21.2 billion 2000: $10.5 billion 102%

Dividends to Free cash flow shareholders 2010: $642 million 2010: $947 million 2000: $336 million 2000: $144 million 91% 558%

Revenue EBITDA Net income

2010: $9.8 billion 2010: $3.6 billion 2010: $1.0 billion 2000: $6.0 billion 2000: $2.4 billion 2000: $681 million 63% %50 47%

High-speed Internet TELUS TV Wireless subscribers Total customer subscribers subscribers connections 2010: 1.2 million 2010: 314,000 2010: 7.0 million 2010: 12.3 million 2000: 26,000 2000: 0 2000: 1.1 million 2000: 6.0 million 4,515% ∞ 536% 105% 2000: Revenue, EBITDA, net income and EPS are 12 months from June 30, 2000. Free cash flow is for year ended Dec. 31, 2000. Subscribers and enterprise value are as at Jan. 1, 2000. 2010: Revenue, EBITDA, net income, EPS and free cash flow are for the year ended Dec. 31, 2010. Subscribers and enterprise value are as at Dec. 31, 2010.

The outlook for 2011 is positive with up to mid-single-digit our team’s actions are four leadership values, including having increases in our targets for consolidated revenue and operating the courage to innovate. Six strategic imperatives have guided earnings in anticipation of further strong wireless performance. our efforts since 2000 and the following is a discussion of EPS is expected to experience a low double-digit increase due key accomplishments in 2010 as they relate to these imperatives. to operating earnings growth and lower financing costs, and free cash flow is expected to have an even higher increase. Building national capabilities We also have a solid track record of attaining the targets we We continued extending the reach and speed of both our set publicly each year. In the past decade, we have met or advanced wireline and wireless broadband networks to bring exceeded 77 per cent of our 48 consolidated financial targets, innovative services to more Canadians. These investments including three out of four in 2010. are enabling us to provide better service offerings for customers Your company has achieved impressive results across an and meet competitive challenges. array of financial and operating metrics in the past 10 years, In late 2009, the launch of Canada’s fastest* coast-to-coast as shown above. HSPA+ network was a massive undertaking that propelled us ahead of the competition, positioning us for profitable growth and improved market share. Moreover, it gave TELUS clients Our strategy more choices, including early access to the newest devices such as the iPhone 4 and BlackBerry smartphones, and international TELUS’ track record of success can be attributed to the con­ roaming to more than 200 countries. sistent execution of our proven national growth strategy focused Through 2010, we continued to enhance the HSPA+ network on wireless and data. In fact, TELUS is the only telco in the with the addition of new 4G dual-cell technology, which, when world that has the same strategy today that it did 10 years ago. complete in 2011, will approximately double data download Notably, it is as relevant today, or even more so, as when we speeds. Our innovative approach includes leveraging our network launched it in 2000. sharing agreement with Bell Canada, a strategy that enables us Our strategy is founded on our strategic intent – to unleash the to deploy network enhancements faster and more cost effectively power of the Internet to deliver the best solutions to Canadians than most of our competitors, whilst vigorously competing at home, in the workplace and on the move. Successfully driving against each other in the retail market.

4 . TELUS 2010 annual report We also enhanced and expanded our wireline broadband $900 million. These managed data solutions will increasingly network to enable faster speeds, advanced Internet services contribute to revenue and earnings in 2011 and beyond. and greater reach for our Optik TV service. Our footprint now reaches more than two million households in B.C., Alberta Providing integrated solutions and Eastern Quebec. Additionally, we are implementing VDSL2 We introduced the Optik brand in June, which brings together technology, which enables even faster network speeds and TELUS’ most innovative IP-delivered services – Optik TV, more HD channels into the home, and expect to complete the powered by Microsoft Mediaroom, and Optik High Speed overlay this summer. Moreover, we continue to build fibre-to- Internet, which can be accessed wirelessly from anywhere in the-home access to connect new residential developments. the home. TELUS Optik TV, which includes PVR Anywhere and Remote Recording using a wireless smartphone, offers Focusing relentlessly on data and wireless more choice, flexibility and control, greatly enhancing the During 2010, TELUS experienced solid growth in data and entertainment experience for customers. Another innovative wireless with combined revenues now representing almost approach we pursued was to be among the first service three-quarters of TELUS’ total revenue of $9.8 billion. providers in the world to use Microsoft’s Xbox as a set-top box. We improved our position in the smartphone marketplace Optik TV is a superior customer entertainment service with our HSPA+ network investment, which enabled us to compared to cable-TV offerings and customer reaction has offer a wide array of compelling devices to meet the growing been distinctly positive. In 2010, total TV net additions were demand of customers across Canada. Smartphone subscribers a record 144,000, 57 per cent higher than in 2009. We expect now represent approximately one-third of TELUS’ postpaid the momentum to continue in 2011. subscriber base, up substantially from one-fifth a year earlier. Our approach to TV content is not to pursue content We have also introduced leading-edge devices running acquisitions as other major competitors have done. We are on the newest operating systems from Apple, Research In Motion striving to deliver the world’s widest and best selection of (RIM), Android and Windows Phone 7, that offer customers content and applications to our customers. We believe that our enhanced applications and functionality. best strategy is to partner as a distributor and remain a pure- Koodo Mobile®, our postpaid value brand, continues play communications company that is adding value through to position us well against new wireless entrants. We have the bundling of products and services in our channels. Indeed, evolved the Koodo® brand strategy from basic talk and owning content could negatively impact our relationships with text to include a limited selection of feature-rich smartphones. other content suppliers. Finally, we recognize that managing Late in the year, we also adjusted our Koodo pricing to legacy broadcast and media properties is not currently a core remain competitive. competency of TELUS and would not address the ongoing In the wireline business market, we maintained our focus shift to social media content and applications. on five key verticals – the public sector, healthcare, financial We are advancing our position in healthcare and, in 2010, services, energy and telecom wholesale. In 2010, we com­pleted became the first in Canada to launch an innovative e-health the implementation of the Department of National Defence platform, called TELUS Health Space®. This complements TELUS’ contract and, in 2011, we will complete the implementation of leadership position in electronic health records in Canada’s the Government of Quebec long-term contract worth up to medical systems. Based on an exclusive partnership to host

innovation in action

To demonstrate the power and potential of TELUS’ communications solutions, we have set up six TELUS Innovation Centres across Canada that showcase our suite of current and emerging products and services and engage visitors in an interactive environment. Using the latest technology and our leading IP-based wireline and high-speed wireless networks, these centres offer real-life demonstrations of a variety of innovative solutions. An example includes our Integrated Bedside Terminal for healthcare, which gives patients access to communications and entertainment services and healthcare professionals access to patient information.

TELUS 2010 annual report . 5 A decadE OF INNOVATION 2003 TELUS ranked number one in advertising and brand awareness according to Leger Marketing

2001 Completed Canada’s first national fibre and IP backbone network 2000 Began the process of national digital network expansion through 2001 to 2004 acquisitions and organic growth Implemented a major multi-year operational 2005 efficiency program that delivered significant Launched our innovative TELUS efficiencies and cost savings and enhanced Community Boards and now have our competitiveness nine boards across Canada

and operate Microsoft HealthVault, this platform enables This offers improved roaming and wireless speeds for business Canadians to create, store and manage their personal health customers, such as those in the oil and gas sectors, and coverage records and securely share them with their care providers. to 95 per cent of the province’s consumer population. Through trials with 2,000 team members and 200 patients and caregivers in Quebec, we are actively shaping new services Investing in customer excellence that should soon be available to millions of Canadians. In 2010, we intensified our focus on delivering an exceptional Notably, TELUS has earned recognition as the number one customer experience and made significant advances in strength- Canadian Healthcare Technology Company by Branham Group ening our business ownership culture across the organization. for three years in a row. In June, we introduced Customers First, an innovative internal program to heighten our focus on the customer experience. Partnering, acquiring and divesting This initiative brought all senior managers to the front line to In early 2011, TELUS acquired Smart Communications, a listen to our customers and learn from fellow team members. TELUS retail partner in Western Canada. This acquisition adds The initiatives identified are leading to meaningful and 21 premium retail locations, further strengthening our wireless measurable improvements. distribution presence in Canada. This ongoing program is already empowering team members In September, TELUS began to offer wireless customers to put customers first in all that we do and many important coverage in Saskatchewan on SaskTel’s new HSPA+ wireless initiatives are underway. Examples include an overhaul of our network through an enhanced network sharing agreement. interactive voice response (IVR) systems to simplify the customer

Clear & Simple innovation

Our Clear & Simple rate plans, which offer simplified pricing and no system access or carrier 911 charges, make it easy for wireless customers to choose a plan that is right for them. In 2010, we added a Clear and Simple Device Upgrade program to help customers obtain new phones before their contracts end. We also launched free TELUS Data Notifications to help customers manage their data usage and a service that identifies lower roaming rates for customers travelling abroad.

6 . TELUS 2010 annual report 2008 Won a landmark seven-to-10-year contract with the Government of Quebec, worth up to $900 million, to deliver and manage the province’s next generation data network

2005 Finalized a landmark five-year collective agreement with unionized team members 2009 that reflected the competitive TELUS recognized as having one of realities of the telecom indus­ Canada’s 10 Most Admired Corporate try and established a new era Cultures by Waterstone Human Capital for TELUS operations 2008 Acquired Emergis, a leading electronic healthcare solutions provider, and launched TELUS Health Solutions experience, more flexible and convenient appointment times The power and consistency of our brand and the emotive for installations, and a number of data service improvements for relationship it creates with people give TELUS instant recognition small and medium business customers. in the marketplace, allowing us to realize a greater return on Our Clear & Simple rate plans, introduced in late 2009 and our advertising spend. The TELUS brand is one of the top brands enhanced in 2010, have resonated well with customers and in Canada, most recently valued at $1.9 billion by Brand Finance, differentiated us from our competitors. Please see the sidebar. a leading global brand valuation consultancy. We believe that a company can only deliver the best We have also advanced from our single brand strategy, results in the industry by having the best team, a team that is initiated a decade ago. Our Koodo brand was launched in 2008 dedicated to making information, communications and tech­ to address competitive market developments and allow us to nology bene­ficial for customers. We continue to introduce build new wireless distribution for TELUS in a cost-effective way. innovative initiatives to create a more enjoyable and productive This brand, which is clearly differentiated from the TELUS brand, work environment. For example, more than half our team earned recognition from Strategy Magazine as a 2010 Brand members are equipped to utilize mobile or work-at-home options. of the Year. We measure our progress through an annual Pulsecheck employee survey and, in 2010, an improved engagement score was achieved, putting us in the top category for large Building a legacy unionized companies. TELUS is committed to fostering diversity and inclusiveness for our communities within both the workplace and the community, and our efforts have garnered external recognition. TELUS has been recognized The TELUS team is collectively creating a community by Waterstone Human Capital as having one of Canada’s 10 investment legacy through innovation that I believe will endure Most Admired Corporate Cultures for the 2009 to 2011 award well into the future. We recognize the symbiotic relationships timeframe. Moreover, TELUS was selected by Mediacorp Canada between the well-being of our company, our people and as one of Canada’s Best Diversity Employers for the third our communities. Corporate social responsibility is inextricably consecutive year. linked to our financial performance and the health of the communities we serve. Going to market with one brand We are aligning charitable giving with TELUS’ revenue growth, Our brand promise – the future is friendly – reflects our culture, while enhancing brand appeal and an emotional connection with values and desire to make communications technology relevant, customers. Notably, we empower socially conscious consumers accessible and enjoyable for individuals and businesses. to make purchasing decisions that benefit local charities.

TELUS 2010 annual report . 7 2010 Introduced TELUS Health Space, Canada’s first electronic health information platform, powered by Microsoft HealthVault

2009 Launched Canada’s fastest* 2010 coast-to-coast HSPA+ network, Introduced the Optik brand, offering customers higher a suite of IP-delivered services wireless data download speeds, including Optik TV, which gained access to the newest mobile 2010 Named the Most Outstanding 10 per cent market share in devices and international Philanthropic Corporation B.C. and Alberta roaming to over 200 countries globally by the Association of Fundraising Professionals

This is demonstrated with our community Optik TV campaign won this international award, which honours the deep commitment where we offer a $100 donation to a local community project of TELUS, its team members and retirees to their communities. for every new customer. Furthermore, with our Go Pink campaign, for each pink BlackBerry device sold between May and Decem­ ber 2010, we donate $25 to regional hospitals for new digital Looking ahead mammography equipment. Both campaigns have been very suc­ cessful, resulting in combined donations of over $5 million for 2010. The competitive pressures under which TELUS operates Our philosophy – we give where we live – has been put continue to intensify. Four new market entrants have launched into practice through a pioneering community investment and wireless service in various urban centres across Canada. engagement strategy. We have nine innovative TELUS Community Cable-TV companies continued their marketing of telephony Boards across Canada, which empowered local community services and one began offering wireless service in Quebec leaders to grant $4.1 million in 2010 to more than 300 grassroots in the fall of 2010. In response, Bell and Rogers have also projects. Since 2000, TELUS, our team members and retirees re-launched or introduced new discount brands. TELUS will have contributed $211 million to charitable and not-for-profit also face additional competitive pressure from Shaw organizations and volunteered 3.7 million hours. Communications’ planned entry into the wireless market The passion to build healthier communities is exemplified in B.C. and Alberta announced for early 2012. each year by the TELUS Day of GivingTM. In 2010, a record Despite these competitive challenges, exciting growth 10,400 volunteers participated in 175 activities across Canada. opportunities remain for TELUS and our investors. These are In addition, the TELUS Community Ambassadors®, our dedicated primarily related to continued wireless growth, successful retiree and team member volunteers, distributed more than Optik TV loading and the improved economic returns from both 60,000 care items to people in need. our elevated focus on the small and medium business market TELUS is committed to reducing our environmental impact, and the implementation of our large enterprise data contracts. in part by adopting the leadership in energy and environmental We are also committed to realizing the benefits of delivering design (LEED) principles for the design, construction and an improved client experience. oper ­ation of green buildings. In 2010, TELUS House Ottawa was On the regulatory front, a number of developments are awarded LEED gold certification from the Canada Green Building expected to be addressed in 2011 by Industry Canada or the Council. We also opened TELUS House Toronto and Place Canadian Radio-television and Telecommunications Commis­sion TELUS Quebec, which are built to LEED gold and silver criteria, (CRTC). These include decisions about foreign ownership respectively, and we look forward to receiving certification. restrictions, usage-based billing and rural broadband require- In 2010, TELUS was named the most outstanding philan- ments. Furthermore, the CRTC will be holding a hearing on thropic corporation globally by the Association of Fundraising content ownership and fair access. We will be looking for the Professionals. This is the first time a Canadian company has CRTC to implement regulatory tools and measures that deal

8 . TELUS 2010 annual report with anti-competitive behaviours regarding content and ensure My personal goals are that TELUS, over the next three years, that consumers continue to be able to access content on reason­ has the potential to generate low double-digit annualized growth able terms regardless of the platform or carrier they choose. in EPS and even greater free cash flow growth, excluding any We are encouraged by the precedent-setting decision of the one-time items such as future spectrum purchases. This would CRTC regarding Videotron’s programming exclusivity, as well as be consistent and supportive of TELUS’ dividend growth model, the actions taken by the CRTC relating to Shaw Communications’ to which I remain strongly committed. Accordingly, I have decided acquisition of Canwest Global and measures taken in the U.S. once again to take the entirety of my 2011 annual cash salary relating to Comcast’s acquisition of NBC Universal. Investors compensation in TELUS shares. should also monitor Industry Canada’s consultations regarding The TELUS team is positioned to successfully progress the rules for the spectrum auctions expected in 2012. our company through 2011 and beyond with the courage to Our collective agreement with the Telecommunications Workers innovate as a core value. We plan to continue generating value Union for 11,000 team members across Canada expired in for our shareholders, debt holders, clients, team members November 2010. Negotiations are well underway and, although and the communities we serve. there can be no assurance that a labour disruption will not occur, we are optimistic that a mutually beneficial agreement will be Thank you for your continued support. reached in the coming months that is reflective of the competitive and economic conditions in which we operate. To help us address these challenges and opportunities and respond effectively in this highly competitive market, we have set five corporate priorities for 2011, which are shown in the sidebar. Darren Entwistle Member of the TELUS Team The courage February 24, 2011 to innovate

This is an exciting time for our company as we are well positioned to realize the competitive advantages of our strategic growth investments. Due to our focus on innovation and operational execution, we are in a position to monetize the benefits being increasingly delivered by our proven strategy, our communications expertise and the strength of our team. As we continue our journey and build on the momentum created in 2010, I am confident that TELUS has many oppor­ tunities in the years ahead to generate sustainable value.

2011 corporate priorities

Every year, we set corporate priorities to help our team advance our national growth strategy, which are to: .. Deliver on TELUS’ future friendly brand promise to clients .. Optimize TELUS’ leading wireless and wireline broadband networks .. Drive market leadership position in small and medium business and healthcare markets .. Continue to improve TELUS’ operational efficiency to effectively compete and fund future growth .. Raise TELUS team engagement to the next level and continue to drive the philosophy of “our business, our customers, our community, our team, my responsibility.”

TELUS 2010 annual report . 9 review of operations WIRELESS

TELUS performs well in an increasingly competitive market

A HISTORY OF INNOVATION Canadian wireless industry market growth accelerated in 2010 with approximately 1.7 million new subscribers and five per cent revenue growth. A key driver has been 2002 Built national 1X wireless the popularity of smartphones, as well as mobile Internet keys. Tablet devices are network, offering fast also emerging as an important growth segment. wireless Internet access These devices provide customers with increased data functionality including to 70 per cent of Canadians access to email, Internet, social networking, multiple applications and streaming video. 2005 Began offering mobile As a result, wireless data revenue in Canada increased by an estimated 34 per cent high-speed Internet in 2010 to $4.1 billion. services such as Air Cards Although smartphones have higher average revenue per unit (ARPU) and lower churn and TELUS mobile TV rates than other devices, they are very expensive and are often sold at a discount, which can negatively impact operating margins in the short term. 2008 Launched Koodo Mobile, With new entrants expanding into all major markets in Canada, 2010 proved to be our value wireless brand a very competitive year. The number of distribution channels and competitive offers grew and service rapidly as new entrants looked to quickly ramp up their operations. 2009 Nationwide launches TELUS thrived in this competitive market by leveraging Canada’s fastest* coast- of fastest* coast-to-coast to-coast HSPA+ network, which enabled us to provide customers with a compelling HSPA+ network, iPhone selection of innovative smartphones, including the latest iPhones, BlackBerrys, Windows and simplified rate plans Mobile 7 and Android-powered devices. We also continued to deliver on our future friendly brand promise with Clear & Simple 2010 Launched TELUS Smart rate plans, a new initiative to increase transparency regarding handset and hardware Hub mobile Wi-Fi upgrades, and ongoing improvements to network speeds and reliability. TELUS wireless revenue growth accelerated in 2010 due to increased subscriber net additions and an improved trend in ARPU. The wireless EBITDA margin remained in the 40 per cent range.

2010 RESULTS – WIRELESS (share of TELUS consolidated) 2011 TARGETS – WIRELESS1 (share of TELUS consolidated)

51% 56% 52% 58% share share share share

revenue (external) EBITDA revenue (external) EBITDA $5.01 billion $2.03 billion $5.2 to $5.35 billion $2.15 to $2.25 billion 1 See Caution regarding forward-looking statements on page 38 of this report.

10 . TELUS 2010 annual report In 2010, we: In 2011, we are: . Continued to deliver on TELUS’ future friendly brand . Enhancing our competitive position by making the mobile promise with our Clear & Simple rate plans and focus on phone ownership experience easy, transparent and straight- the customer experience forward for customers . Introduced the Clear and Simple Device Upgrade program, . Leveraging our wide selection of smartphones and new enabling customers to purchase the latest devices before the Internet-enabled mobile devices such as tablets to offer end of their contracts new video content and cloud-based applications . Leveraged our HSPA+ network to offer new and cool . Offering even faster data transfer speeds by rolling out 4G wireless data devices and applications to businesses and HSPA+ dual-cell technology, the next step on the path consumers across Canada towards long-term evolution (LTE) technology . Grew wireless data revenue by $260 million or 30 per cent . Increasing international roaming revenue as both global to more than $1.1 billion carriers and consumers upgrade to HSPA+ . Enhanced Koodo’s service offering with several smartphones . Targeting revenue growth of up to seven per cent in our and utilized Koodo to compete in the price-sensitive value wireless operations. segment of the market . Increased the number of postpaid subscribers who have smartphones to 1.9 million, up from one million in 2009.

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TELUS 2010 annual report . 11 review of operations WIRELINE

New TELUS revenue streams to offset legacy service declines

A HISTORY OF INNOVATION The Canadian wireline market is mature with flat to negative revenue growth. The convergence of IT and telecommunications is causing a migration to IP-based 2001 Opened two world-class integrated and managed services. Many companies, including cable-TV companies, Internet data hosting are pursuing these opportunities with voice over IP (VoIP) services, particularly in centres the small and medium business (SMB) market. In the residential market, local, 2004 Introduced TELUS Future long distance and Internet services remain very competitive, while TV entertainment Friendly Home® strategy, continues to be a key area of growth. offering new digital home For incumbent telcos, combined IP, voice, data and video solutions create cost solutions to consumers efficiencies to partially compensate for margin pressures caused by migration from legacy voice and long distance services. 2006 Began significant multi- All sectors of the wireline market were competitive in 2010, with aggressive year broadband expansion, introductory promotions and discounting on service bundles being typical in the with array of new tech­ residential market. nologies, as our platform TELUS is offering a series of business solutions targeting specific high-value enterprise for future growth and public sector segments. As well, we are strengthening our SMB offerings. 2010 Launched Optik brand TELUS focused on expanding our network coverage footprint with the continued for our IP-based TV and roll-out of advanced technologies. This larger footprint, combined with the launch of High Speed Internet enhanced IP TV service powered by the Microsoft Mediaroom platform, drove increasing services customer demand. Branded and mass marketed as Optik, our TV and High Speed Internet suite of services enjoyed widespread acceptance in urban markets in Alberta 2010 Introduced TELUS Health and B.C. Our superior TV entertainment experience, bundled with other TELUS Space, an e-health records services, is helping to slow erosion of legacy voice services. platform for consumers TELUS wireline revenue declined slightly in 2010 due to lower legacy voice and long distance revenues, partially offset by data growth. The wireline EBITDA margin increased to 33 per cent, reflecting effective cost control.

2010 RESULTS – WIRELINE (share of TELUS consolidated) 2011 TARGETS – WIRELINE1 (share of TELUS consolidated)

49% 44% 48% 42% share share share share

revenue (external) EBITDA revenue (external) EBITDA $4.77 billion $1.61 billion $4.725 to $4.875 billion $1.525 to $1.625 billion 1 See Caution regarding forward-looking statements on page 38 of this report.

12 . TELUS 2010 annual report Meet Danny the installer, who was introduced to demonstrate the benefits of the incredible home entertainment that Optik provides to consumers. As the first spokesperson to appear in our advertising, Danny represents the evolution of the TELUS brand from the exclusive use of nature-based imagery to images that enable us to connect with our customers in a new way. Danny appears in TV spots, online campaigns and web videos, which you can watch at telus.com/optiktv.

In 2010, we: In 2011, we are: .. Expanded our broadband network with ADSL2+ technology .. Improving the customer experience by simplifying products, to reach 2.1 million households in the top markets in B.C., clarifying communications and improving installation and Alberta and Eastern Quebec repair quality .. Continued our network upgrade to VDSL2 technology, .. Accelerating growth of Optik TV and High Speed Internet increasing broadband download speeds to up to 30 megabits services to improve client loyalty while reducing the cost per second (Mbps), and deployed fibre-to-the-home in of acquisition certain areas .. Delivering increased sales in the SMB market through .. Launched Optik TV service featuring PVR Anywhere, enhanced coverage and connectivity, simple and targeted and introduced wireless Remote Recording offers, and high-quality customer service .. Boosted the TELUS TV subscriber base by 85 per cent .. Moving from trials to a commercial roll-out of TELUS to 314,000 Health Space .. Reduced our operating expenses through ongoing .. Targeting revenue operational efficiency growth of up to .. Introduced TELUS Health Space, Canada’s first personal two per cent in our electronic health information platform that offers secure wireline operations. sharing applications to licensing organizations.

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TELUS 2010 annual report . 13 2010 scorecard OUR PERFORMANCE

At TELUS, we believe in setting annual financial targets to provide clarity for investors and help drive organizational performance. This scorecard shows TELUS’ 2010 performance against our original consolidated targets. The achievement of three out of four targets reflects strong wireless performance and the realization of benefits from our strategic investments in broadband networks and operating efficiency in recent years. Revenues were lower than expected, reflecting a shortfall from wireline sales growth and ongoing erosion in legacy voice services.

Consolidated 2010 results 2010 original targets Result Revenues $9.779 billion $9.8 to $10.1 billion 6 EBITDA $3.643 billion $3.5 to $3.7 billion 4 Earnings per share (EPS) – basic1 $3.23 $2.90 to $3.30 4 Capital expenditures $1.721 billion $1.7 billion approximately 4

1 Includes nine cents per share of positive income tax-related adjustments offset by 12 cents per share for a loss on early partial redemption of long-term debt, neither of which were contemplated in setting 2010 targets.

4 Met target 6 Did not meet target

For further information, see Section 1.4 of Management’s discussion and analysis in this report.

14 . TELUS 2010 annual report 2011 targets OUR GOALS

TELUS’ 2011 financial targets1 reflect growth generated by significant broadband infrastructure investments and are consistent with our national growth strategy focused on wireless and data. For more information and a complete set of 2011 financial targets and assumptions, see Sections 1.4 and 1.5 of Management’s discussion and analysis in this report.

REVENUES ($ billions) EBITDA2 ($ billions)

11 IFRS target 9.925 to 10.225 11 IFRS target 3.675 to 3.875

10 IFRS 9.79 10 IFRS 3.65

1009 C-GAAP 9.78 10 C-GAAP 3.64

0809 9.61 09 3.49

0807 9.65 08 3.78

0706 9.07 07 3.76

06 8.68 06 3.62

Increase of 1 to 4% largely driven by growth in wireless Represents growth of 1 to 6% driven by wireless and data and wireline data revenue growth supported by continued network investments

EPS – BASIC ($) CAPITAL EXPENDITURES3 ($ billions)

11 IFRS target 3.50 to 3.90 11 IFRS target approx. 1.7

10 IFRS 3.27 10 IFRS 1.72

10 C-GAAP 3.23 10 C-GAAP 1.72

09 3.14 09 2.10

08 3.52 08 1.86

07 3.79 07 1.77

06 3.33 06 1.62

Increase of 7 to 19%, reflecting expected growth in EBITDA Continue to enhance wireline and wireless broadband as well as lower financing costs and lower tax rates networks and increase Optik TV subscriber loading

1 As a result of TELUS’ changeover to International Financial Reporting Standards (IFRS) accounting on January 1, 2011, targets for 2011 are in accordance with IFRS. Unaudited IFRS 2010 comparative results are provided for reference. The results for 2006 to 2009 are in accordance with Canadian generally accepted accounting principles (C-GAAP) and have not been restated in accordance with IFRS. 2 2007 EBITDA excludes $169 million net-cash settlement feature expense for past options. 3 Excludes wireless spectrum costs of $882 million in 2008.

These 2011 targets are qualified in their entirety by the Caution regarding forward-looking statements on page 38 of this report.

TELUS 2010 annual report . 15 community investment WE GIVE WHERE WE LIVE

Through TELUS’ community investment philosophy – we give where we live – the company is creating a legacy of giving based on innovation and a passion to help build healthier communities. Our efforts focus on arts and culture, education and sport, and health and well-being in our environment, in ways that support youth and showcase technology.

2010 TELUS DAY OF GIVING Giving locally to grassroots charities TELUS Community Boards bring together influential community leaders and TELUS 15,950 meals prepared team members to provide funding to local grassroots charities. This innovative approach and served to those delegates funding decisions to the local level to help ensure our support will have the in need most impact. 139,560 ribbons tied for Nine TELUS Community Boards are located across Canada in Victoria, Vancouver, Canadian Breast Edmonton, Calgary, Toronto, Ottawa, Montreal, Rimouski and Atlantic Canada. Cancer Foundation In 2010, TELUS Community Boards allocated $4.1 million to local charities and non- profit organizations and supported more than 300 projects. Since their inception, 2,600 trees, plants and TELUS Community Boards have allocated $25 million to local charities and non-profit shrubs planted in organizations and supported close to 1,900 community projects nationwide. parks and gardens We also have eight TELUS Community Action Teams, which, in 2010, donated 7,860 Kits for Kids assembled $236,000 and supported more than 80 grassroots projects in smaller communities. to provide supplies to students in need Rolling up our sleeves to pitch in The fifth annual TELUS Day of Giving took place across Canada in May with a record 10,400 team members, retirees, family and friends coming together to participate in over 175 activities. Since 2006, over 41,000 volunteers have been mobilized at 950 TELUS- organized activities on this special day.

16 . TELUS 2010 annual report Team members pitched in on the TELUS Day of Giving. From left, Monty Carter, president of Enterprise Solutions, prepared food hampers at the Calgary Food Bank; Ryan Lowe, team manager of Small and Medium Business Client Loyalty and Retention, helped with landscaping at the North York YMCA; and Allison Vale, senior marketing communications manager, and her mother, Christine Vale, sorted food at the Daily Bread Food Bank in Toronto.

Internationally, the TELUS Day of Giving took place in Manila, The 2010 TELUS Walk to Cure Diabetes took place in over Philippines and at TELUS International locations in Central America, 70 communities across the country. More than 3,750 team with 4,200 team members, family and friends participating. members, retirees, family and friends participated in 47 com­ The TELUS Community Ambassadors include more than munities and raised $435,000. Overall, 45,000 Canadians joined 2,300 retirees and team members who volunteer their time the 2010 Walk and raised $7.5 million for the Juvenile Diabetes to deliver numerous community programs and care items to Research Foundation. people in need. Ambassadors from the 20 clubs across Canada contributed more than 60,000 care items in 2010, including Being socially responsible backpacks filled with school supplies, heart pillows and comfort At TELUS, we understand there is a symbiotic relationship bears for recovering patients, and baby bags filled with essential between the success of our company and the health of our infant care items. communities. We are a company that measures success by more than just profitable returns. This is why our triple bottom Making a difference through giving line approach, incorporating economic, social and environmental TELUS continues to be an Imagine Caring Company, donating aspects, is embedded in the culture of our company. more than one per cent of our pre-tax profits to charitable Through the year, we look for ways to align our business organizations each year. with our corporate philanthropy by providing customers with Through the Team TELUS Charitable Giving program, the opportunity to help their community when they make a team members, retirees, board members and retail dealers purchase from TELUS. donate funds to the Canadian charities they care most For example, with our Go Pink campaign, for every pink about, which TELUS then matches dollar for dollar. In 2010, BlackBerry device sold from May to December 2010, we donated we donated $7.2 million through this program to more than $25 to regional hospitals across the country for the purchase of 2,800 charities. new digital mammography equipment. The campaign raised more The Dollars for Doers program recognizes the volunteer than $2 million to assist in the early detection of breast cancer efforts of our team members and retirees with a donation to a and also inspired over 800,000 people to turn their Facebook charity of their choice when they volunteer more than 50 hours profile picture pink. The campaign directly connects our marketing in a year. In 2010, more than 5,760 team members and retirees efforts with local social outcomes, and enhances our brand donated over 550,000 hours of their personal time, resulting appeal and emotional connection with customers. in TELUS donating $850,000 to Canadian charities. In 2010, TELUS was named the most outstanding philanthropic company globally by the Association of Fundraising Professionals.

In 2010, TELUS, our team members and retirees contributed $37.5 million to charitable and not-for-profit organizations and volunteered more than 550,000 hours to local communities. Charitable organizations can apply for funding at telus.com/community. Scan this mobile barcode for the complete CSR story, or visit telus.com/csr. New to mobile barcodes? See the inside back cover for information. questions and answers TALK WITH OUR LEADERS

How is TELUS competing in the Optik High Speed Internet provides access speeds of up to residential TV and Internet markets? 25 megabits per second (Mbps) available wirelessly throughout a customer’s home. Optik TV, powered by Microsoft Mediaroom, JOE NATALE is a superior TV service that offers customers access to over Executive Vice-President and 400 TV channels, including more than 85 in HD, video on demand, Chief Commercial Officer, picture-in-picture browsing, fast channel changing and on-screen TELUS Customer Solutions call display for incoming phone calls. A key differen­tiator is PVR Anywhere, which wirelessly networks up to six TVs in the In past years, we have faced the home with one multi-tuner PVR, allowing customers to pause competitive challenge of the cable-TV a recorded show in one room and resume watching it in companies making steady inroads into the local telephony another room. market. However, the opportunity to compete effectively in the A further development was the launch of Remote Recording entertainment market was constrained given that our broadband last August, an integrated solution that allows Optik customers footprint was not large enough to mass market our TV services. to program their PVR remotely using web-enabled devices such In 2010, the situation began to turn in our favour. as iPhones and certain other smartphones. Additionally, TELUS In 2010, TELUS created competitive advantage in Western Optik TV customers were among the first in the world to be able Canada and Eastern Quebec on several fronts. Facilitated to use the Xbox 360 as a digital set-top box. by ongoing capital investments, we introduced Optik TV and As a result of these service enhancements, Optik experienced High Speed Internet service, launched an innovative marketing very strong demand in 2010 with a record 144,000 TV additions, campaign and improved our service bundles. an 85 per cent increase in TELUS’ TV subscriber base. TELUS’ ongoing significant investment in the expansion of High-speed Internet growth has also resumed and network our fibre-optic network in recent years has given us the capacity access line erosion has slowed. to introduce Western Canadians to the most compelling home Notably, we took the opportunity with the Optik launch to entertainment services on the market today. evolve our nature-based brand with the introduction of the In 2010, TELUS revolutionized home entertainment with first person to appear alongside a TELUS critter. The TV spots a new suite of advanced TV and high-speed Internet services. and web videos with Danny the installer allow us to better explain the many Optik features to consumers while staying true to our brand promise of making new technologies simple, relevant and enjoyable to use. TELUS’ extensive Western Canadian distribution network is a key competitive advantage over our major cable-TV competitor, giving us the ability to be a one-stop shop for all mobility and wireline offerings. We also have the advantage of being able to offer an integrated service bundle in Alberta, B.C. and Eastern Quebec with Optik TV and High Speed Internet, along with wireline and wireless voice and data. These differentiating factors and innovative initiatives, par­ ticularly those related to our entertainment offering, are providing positive momentum for TELUS in the competitive TV and high-speed Internet market.

18 How is TELUS competing with new What is TELUS’ strategy regarding and existing wireless brands? its broadband networks and what are the benefits for customers JOE NATALE: TELUS has made a number of investments and and investors? innovations in recent years to significantly improve our competitive position in the wireless market and prepare for new competitors. EROS SPADOTTO Koodo, our postpaid value brand, was launched in 2008 Executive Vice-President, with lower price points and a simplified, lower-cost approach. Technology Strategy This brand continues to successfully position TELUS against new entrant service offerings, which have largely focused on the Hyper-connectivity has the potential value segment of the wireless market. The now widely recognized to greatly increase network traffic and and differentiated Koodo brand attests to TELUS’ best-in-class has emerged as the key phenomenon brand and service development. that is now driving network investments. Smartphones took TELUS’ acquisition of Black’s Photo in 2009 strengthened centre stage last year, and in 2011 we believe new options in our wireless distribution network in premium mall locations, hardware and additional services will enable consumers to particularly in Ontario. And early in 2011, we acquired Smart do more in more places than ever before. This could include Communications, a successful TELUS dealer in Western Canada posting on Facebook from your TV, video-gaming on powerful with 21 locations, which augments our exclusive retail presence. smartphones and watching the end of last night’s TV show Our extensive established distribution network represents on a tablet on the train. To enable this, TELUS continues to an important competitive advantage, particularly relative to make capital investments each year that extend the speed, new entrant brands. reach and capabilities of our advanced wireless and wireline In late 2009, TELUS launched Canada’s fastest* coast-to-coast broadband networks. mobile network based on high-speed packet access (HSPA+) The launch of Canada’s fastest* coast-to-coast HSPA+ tech­nology, now offering 97 per cent of Canadians access to network in late 2009 significantly enhanced our ability to com- manufacturer-rated wireless data download speeds of up to pete for new customers. We continue to maximize the potential 21 Mbps and international roaming in more than 200 countries. of our 4G HSPA+ network with the deployment of dual-cell The move to HSPA+ also enabled us to offer customers an technology in large urban areas, which we expect to double increasingly wide selection of devices, services and applications, manufacturer-rated data download speeds in 2011 to up to based on a variety of new mobile platforms. New entrants do 42 Mbps. Upgrading to dual-cell technology is a natural progres- not have the same wide array of customer choices. sion on our path to long-term evolution (LTE) technology, which In early 2011, we launched HSPA+ dual-cell technology, which is expected to further enhance network speeds, capabilities we expect will further increase manufacturer-rated maximum and efficiencies. data download speeds to up to 42 Mbps to meet the growing wireless needs of Canadians. In late 2010, TELUS continued to expand our promise of pricing and contract transparency, building on the Clear & Simple rate plans first launched in late 2009. We introduced Clear and Simple Device Upgrades, which offer customers a fair and simple way to upgrade to a new device without waiting until the end of their contract term. Our approach is working as indicated by the addition of 447,000 new wireless customers in 2010, an increase of 10 per cent in net additions from a year ago. As well, with significant investments made in our networks, TELUS can offer customers premium wireless, TV entertainment, Internet and wireline local and long distance services. Combined, all of these factors differentiate TELUS in the wireless market, strengthen our competitive position and allow us to successfully compete with existing and new wireless brands.

TELUS 2010 annual report . 19 In 2010, we substantially completed our ADSL2+ broadband What is TELUS doing to help build to 2.1 million households in B.C., Alberta and Eastern transform healthcare across Quebec. We also continued to overlay VDSL2 technology in our Canada and what are the prospects broadband network, enabling us to further enhance Internet for growth? and TV viewing experiences with significantly faster network speeds. We plan to complete this in 2011. TELUS is also FRANÇOIS CÔTÉ implementing key upgrades to our IP core and distribution Executive Vice-President, and President networks. These major investments will enable TELUS of TELUS Québec and TELUS Health to continue offering premium differentiated and integrated and Financial Solutions Optik TV service and applications. To future-proof our infrastructure, TELUS continues to TELUS Health Solutions is in a key deploy fibre-to-the-home access using gigabit passive optical position to help transform the way health network (GPON) technology to connect new single-family information is used across the continuum of care. With escalating residential developments and fibre-to-the-building to connect costs and the increasing challenge to provide more effective new condos and apartments. care to the Canadian population, we believe the best solution TELUS is converging voice, Optik TV and data services is through innovation and investment in information and com­­ over our next-generation IP networks, which are expected munications technology that can reduce costs and errors, to support the ever-increasing customer demand for TV, better connect patients, improve health outcomes and drive Internet and wireless services in more places. We are well the prevention of illness. positioned to offer new services, such as TV on your computer TELUS is actively pursuing this exciting endeavour. We or mobile device. Additional convergence benefits include are the national leader in the e-health field, providing electronic simplification of the network, reduced provisioning time and health records for more than five million Canadians and elec- improved reliability. tronic solutions to over 3,000 pharmacies across the country. The ongoing capital investments that are extending the We are also the leading provider of electronic services to speed, reach and capabilities of TELUS’ advanced wireless and Canadian insurance companies, handling drug, dental and wireline broadband networks should further enhance the cus- extended healthcare claims nationwide for over 10 million tomer experience and also strengthen our competitive position. Canadians with our advanced and secure technologies.

20 . TELUS 2010 annual report This growth should continue as even more private and public Should TELUS buy a content provider sector employers adopt our integrated system. to stay competitive with its peers? We are building on this foundation and our strong relationships with provincial, regional and municipal healthcare organizations ROBERT MCFARLANE to deliver new health information solutions for practitioners. Executive Vice-President In May, we launched TELUS Health Space, Canada’s first and Chief Financial Officer, online platform powered by Microsoft that gives consumers Corporate and Regulatory Strategy the ability to securely generate, store and control their health information in a safe environment and share it with their family With Shaw buying the television assets and care providers. Last fall, more than 2,000 TELUS team of Canwest at the end of 2010 and members took part in an employee trial focusing on heart health. BCE’s pending acquisition of CTV in 2011, control of content has In January 2011, we launched an external pilot program with been a keenly discussed, high-profile issue for the industry, the a partner, the first of its kind in Canada, in Quebec City, where regu ­lator and TELUS. Our company’s differentiated approach patients have access to their electronic medical records from is consistent with our content strategy, which is to aggregate, their physician through their Health Space account. This paves integrate and make accessible the best content and applications the way for new solutions, including personal health records, that for our 12 million customers, through whichever device or could soon be available electronically to millions of Canadians. platform they choose. From patients to doctors and clinics to acute care, we TELUS believes that it is not necessary to own content are at the forefront of healthcare IT, enabling information to flow to make it accessible to our customers on an economically across the continuum of care. We deploy technologies that enable attractive basis. We also believe that owning content could limit hospitals to aggregate patient data, allowing doctors to make the audience for that content through exclusive arrangements timely decisions right at the bedside or point of care. This timely or have a potential detrimental impact on other content supplier exchange of information is fundamentally changing healthcare relationships. Our core competencies do not currently include delivery and challenging the status quo, while bringing savings producing and distributing content, and to attempt this could and better patient outcomes. Data is delivered to healthcare expose our company to additional operational risk. providers and consumers in a safe and secure fashion. And our In addition, it is important to realize that the Canadian mobile technology allows us to deliver data remotely, helping content assets involved in recent acquisition transactions are to realize the goal of anytime, anywhere healthcare. primarily legacy broadcast media properties. They do not neces- TELUS has invested more than $800 million in the past sarily reflect the shift to new media and user-driven interactive three years in healthcare technology. The TELUS Health Solutions applications such as Facebook, Twitter and YouTube and the team is working with healthcare partners to drive a transforma- newest enabling platforms such as Android and Apple that allow tion to help achieve industry-critical cost and efficiency benefits. consumers to personalize and consume content on demand. We are leveraging our national reach, broadband networks and The CRTC has scheduled a public policy hearing in June 2011 expertise to capture growth in the multi-billion-dollar Canadian on the effects of consolidation and vertical integration in the healthcare-related telecom and IT sector. Canadian broadcasting industry, with the aim of putting in place norms for commercial interaction that would provide all players with a fair opportunity to negotiate terms and conditions, including rates, related to the carriage of programming, services and content. TELUS is encouraged that the CRTC has recognized the importance of competition in the carrier market and is seeking to implement appropriate safeguards against self-dealing and anti-competitive behaviour with respect to content. While many of our peers are investing billions of dollars to own and produce content, TELUS continues to focus investments on enhancing our advanced broadband and wireless networks and service capabilities so that our customers can readily access all of the content available in this increasingly Internet- connected and content-rich world.

TELUS 2010 annual report . 21 board of directors INTEGRITY TO GUIDE

R.H. (Dick) Auchinleck Micheline Bouchard Brian A. Canfield Residence: Victoria, British Columbia Residence: Montreal, Quebec Residence: Point Roberts, Washington Principal occupation: Corporate Director Principal occupation: Corporate Director Principal occupation: Chair, TELUS Director since: 2003 Director since: 2004 Corporation Education: Bachelor of Applied Science Education: Bachelor of Applied Science Director since: 1989 (Chemical Engineering), University of British (Engineering Physics) and Master of Applied Education: Honorary Doctorate in Technology, Columbia Science (Electrical Engineering), École British Columbia Institute of Technology; and Other boards and affiliations: ConocoPhillips Polytechnique; and Honorary Doctorates Banff School of Advanced Management Inc. and Enbridge Commercial Trust from Université de Montréal (HEC), University Other boards and affiliations: Suncor TELUS Committees: Pension; and Chair, of Waterloo, University of Ottawa, Ryerson Energy Inc.; Member of Order of Canada Corporate Governance Polytechnic University and McMaster University and of Order of British Columbia; and TELUS shareholdings: 49,543 Other boards and affiliations: Harry Winston Fellow of the Institute of Corporate Directors Diamond Corporation and M.R.C.N.R. TELUS shareholdings: 71,216 A. Charles Baillie Advisory Council; Certified Member of the TELUS options: 3,200 Residence: Toronto, Ontario Institute of Corporate Directors; and Member Principal occupation: Chair, Alberta of Order of Canada Pierre Ducros Investment Management Corporation TELUS Committees: Pension, and Human Residence: Montreal, Quebec Director since: 2003 Resources and Compensation Principal occupation: President, P. Ducros Education: Bachelor of Arts, Honours (Political TELUS shareholdings: 28,885 & Associés Inc. Science & Economics), University of Toronto; Director since: 2005 MBA, Harvard Business School; and Honorary R. John Butler, Q.C. Education: Bachelor of Arts, Université de Doctorate of Laws, Queen’s University Residence: Edmonton, Alberta Paris at Collège Stanislas, Montreal; Royal Other boards and affiliations: Canadian Principal occupation: Counsel, Bryan Military College of Canada; and Bachelor National Railway Company and George & Company of Engineering (Communications), McGill Weston Limited; Chair of the Art Gallery of Director since: 1995 University Ontario; Officer of Order of Canada; Education: Bachelor of Arts and Bachelor Other boards and affiliations: Canadian Chancellor Emeritus of Queen’s University; of Law, University of Alberta Institute for Advanced Research; Chairman of Companion of the Canadian Business Hall of Other boards and affiliations: Trans Global Medical.MD EHR Inc. and Manulife Financial Fame; and Fellow of the Royal Conservatory Insurance Company and Trans Global Life Corporation; Member of Order of Canada; TELUS Committees: Pension; and Chair, Insurance Company; Trustee, Liquor Stores and Officer of Order of Belgium Human Resources and Compensation Income Fund; and Chair, Canadian Football TELUS Committees: Corporate Governance, TELUS shareholdings: 106,855 League Board of Governors and Human Resources and Compensation TELUS Committees: Corporate Governance, TELUS shareholdings: 28,399 and Human Resources and Compensation TELUS shareholdings: 34,056 TELUS options: 2,700

TELUS shareholdings represent the total common and non-voting shares and deferred stock units (restricted stock units for Darren Entwistle) held as at December 31, 2010. TELUS options represent the total options for common or non-voting shares held as at December 31, 2010.

Dick Auchinleck Charles Baillie Micheline Bouchard John Butler Brian Canfield Pierre Ducros

22 R.E.T. (Rusty) Goepel William (Bill) A. MacKinnon Ronald P. Triffo Residence: Vancouver, British Columbia Residence: Toronto, Ontario Residence: Edmonton, Alberta Principal occupation: Senior Vice-President, Principal occupation: Corporate Director Principal occupation: Chairman, Stantec Inc. Raymond James Financial Ltd. Director since: 2009 Director since: 1995 Director since: 2004 Education: Bachelor of Commerce (Honours), Education: Bachelor of Science (Civil Education: Bachelor of Commerce, University University of Manitoba; and Chartered Engineering), University of Manitoba; Master of British Columbia Accountant (Canada) of Science (Engineering), University of Illinois; Other boards and affiliations: Amerigo Other boards and affiliations: Osisko Mining and Banff School of Advanced Management Resources Ltd., Auto Canada Inc., Baytex Corporation, Novadaq Technologies Inc., Other boards and affiliations: Alberta’s Energy Corp., Spur Ventures Inc. and Pioneer Petroleum Limited, Public Sector Promise, Board of Governors of Junior Vancouver Airport Authority; Governor of Pension Investment Board, Toronto Community Achievement of Northern Alberta, and Business Council of B.C.; Chair of Vancouver Foundation and Roy Thomson Hall; Chair of Advisory Council of the Faculty of Medicine 2010 Olympic Organizing Committee; and Canadian Institute of Chartered Accountants, and Dentistry at University of Alberta; and Chairman of Yellow Point Equity Partners Toronto East General Hospital and Toronto Chairman of Alberta Innovates – Technology TELUS Committees: Corporate Governance, Board of Trade; and Fellow of the Institute of Solutions and Pension Chartered Accountants of Ontario TELUS Committee: Audit TELUS shareholdings: 40,707 TELUS Committee: Audit TELUS shareholdings: 55,098 TELUS shareholdings: 16,643 TELUS options: 2,700 John S. Lacey Residence: Thornhill, Ontario Brian F. MacNeill Donald Woodley Principal occupation: Chairman, Advisory Residence: Calgary, Alberta Residence: Mono Township, Ontario Board of Brookfield Special Situations Principal occupation: Corporate Director Principal occupation: Corporate Director Partners Ltd. (formerly Tricap) Director since: 2001 Director since: 1998 Director since: 2000 Education: Bachelor of Commerce, Montana Education: Bachelor of Commerce, Education: Program for Management State University; and Chartered Accountant University of Saskatchewan; and MBA, Development, Harvard Business School (Canada) Richard Ivey School of Business, Other boards and affiliations: Ainsworth Other boards and affiliations: Suncor Energy University of Western Ontario Lumber Co. Ltd., George Weston Limited and Inc., Capital Power Corp., Oilsands Quest Inc. Other boards and affiliations: Canada Post Loblaw Companies Limited; and Chairman of and West Fraser Timber Co. Ltd.; Member of Corporation and Steam Whistle Brewing Inc. Doncaster Consolidated Ltd. Order of Canada; and Fellow of the Chartered TELUS Committees: Corporate Governance; TELUS Committee: Audit Accountants of Alberta and of the Institute of and Chair, Pension TELUS shareholdings: 47,956 Corporate Directors TELUS shareholdings: 36,351 TELUS options: 1,600 TELUS Committee: Chair, Audit TELUS options: 2,700 TELUS shareholdings: 61,931 TELUS options: 2,700 Darren Entwistle Residence: Vancouver, British Columbia Principal occupation: President and Chief Executive Officer, TELUS Corporation Director since: 2000 Education: Bachelor of Economics (Honours), Concordia University; MBA (Finance), McGill University; and Diploma (Network Engineering), University of Toronto Other boards and affiliations: Canadian For more information on our Board of Council of Chief Executives and McGill Directors, visit telus.com/annualreport University (Board of Governors); and Honorary Fellow of the Royal Conservatory and click on Our message and team. TELUS shareholdings: 435,045 TELUS options: 917,840

Rusty Goepel John Lacey Bill MacKinnon Brian MacNeill Ron Triffo Don Woodley executive leadership team COMMITTED TO LEAD

Josh Blair Robert McFarlane Kevin Salvadori Executive Vice-President, Executive Vice-President and Executive Vice-President, Business Human Resources Chief Financial Officer Transformation and Technology Operations Location: Vancouver, British Columbia Location: Vancouver, British Columbia Location: Vancouver, British Columbia Joined TELUS: 1995 Joined TELUS: 2000 (Clearnet: 1994) Joined TELUS: 2000 (Clearnet: 1995) Executive: 2007 Executive: 2000 Executive: 2003 Education: Bachelor of Engineering Education: Bachelor of Commerce (Honours), Education: Bachelor of Applied Science (Electrical – Distinction), University of Victoria; Queen’s University; and MBA, University of (Systems Design Engineering), University and Executive Program, Queen’s School Western Ontario of Waterloo of Business Boards and committees: Royal and Boards and committees: BC Technology Boards and committees: Kids Health SunAlliance Insurance Company of Canada Industry Association and Teradici Corporation Foundation; Board of Advisors for Cures and Chair of its Audit Committee; Vice-Chair TELUS shareholdings: 82,012 for Kids Foundation; and Vice-Chair of Business Council of British Columbia; TELUS options: 283,990 of TELUS Vancouver Community Board Vancouver College Limited Board and TELUS shareholdings: 49,923 member of its Finance Committee; Queen’s Eros Spadotto TELUS options: 167,015 University Campaign Cabinet; and The Executive Vice-President, Salvation Army Greater Vancouver Advisory Technology Strategy François Côté Board – B.C. Division and The Salvation Location: Toronto, Ontario Executive Vice-President and President Army National Advisory Board Joined TELUS: 2000 (Clearnet: 1995) of TELUS Québec and TELUS Health and TELUS shareholdings: 141,149 Executive: 2005 Financial Solutions TELUS options: 294,190 Education: Bachelor of Applied Science Location: Montreal, Quebec (Electrical Engineering), University of Windsor; Joined TELUS: 2008 (Emergis: 1998) Joe Natale and MBA, Richard Ivey School of Business, Executive: 2009 Executive Vice-President and University of Western Ontario Education: Bachelor of Social Sciences Chief Commercial Officer, TELUS shareholdings: 50,006 (Industrial Relations), Laval University TELUS Customer Solutions TELUS options: 292,730 Boards and committees: Institut de Location: Toronto, Ontario Cardiologie de Montréal (Montreal Heart Joined TELUS: 2003 Darren Entwistle Institute), Acti-Menu and Biotonix Inc.; Executive: 2003 President and Chief Executive Officer and member of the Board of Governors for Education: Bachelor of Applied Science Biography can be found on page 23. the Fondation de la tolérance (Tolerance (Electrical Engineering), University of Waterloo Foundation) Boards and committees: Royal Conservatory TELUS shareholdings: 45,390 of Music and Soulpepper Theatre TELUS options: 158,944 TELUS shareholdings: 77,079 TELUS options: 301,576

For more information on our executive TELUS shareholdings represent the total common and non-voting shares and restricted stock units leadership team, visit telus.com/annualreport held as at December 31, 2010. TELUS options represent the total options and click on Our message and team. for common or non-voting shares held as at December 31, 2010.

Josh Blair François Côté Robert McFarlane Joe Natale Kevin Salvadori Eros Spadotto where we are COAST TO COAST

Wireless coverage including HSPA+ and CDMA high- speed service, and iDEN (Mike Push to TalkTM) Backbone optical and British IP wireline network Columbia Interconnection with Alberta Canadian, U.S. and global carriers Wireline switching centres, Quebec and fibre and Internet backbone points of Ontario presence Intelligent Internet data centres, switching centres, and fibre and Internet backbone points of presence

Coverage areas are approximate as of December 2010. Actual coverage and network services may vary and are subject to change.

TELUS offers digital wireless service to 99 per cent of Canadians, with access to Canada’s fastest* coast-to- coast HSPA+ network, as well as our CDMA and iDEN networks. Traditional telephony, data services and IP-based solutions are delivered through our national fibre-optic backbone. IP-based TELUS Optik TV service is available across British Columbia, Alberta and Eastern Quebec. To see our HSPA+ wireless network coverage, visit telusmobility.com/coverage.

Giving where we live Our people

Our innovative grassroots approach to philanthropic 17% 22% Alberta Ontario initiatives is brought to life by our TELUS Community Boards across Canada.

The local chairs of the nine Boards are: 34,800 employees . Mel Cooper – Victoria . Bernard Lamarre – 22% 14% . Nini Baird – Vancouver Montreal British Quebec Columbia . Doug Goss – Edmonton . Camille Leblanc – 1% . Ken King – Calgary Rimouski Other Canadian . Rita Burak – Toronto . General (retired) 24% International provinces . Janet Yale – Ottawa Rick Hillier – Atlantic Canada The 34,800 members of the TELUS team serve our cus- tomers from locations across Canada and internationally.

TELUS 2010 annual report . 25 FINANCIAL REVIEW

what’s inside

CFO letter to investors 27 corporate governance 30 financial and operating statistics annual and quarterly consolidated financials 32 annual and quarterly operating statistics 34 annual and quarterly segmented statistics 36 management’s discussion and analysis caution regarding forward-looking statements 38 1. introduction 40 2. core business and strategy 47 3. key performance drivers 48 4. capabilities 50 5. discussion of operations 55 6. changes in financial position 64 7. liquidity and capital resources 66 8. critical accounting estimates and accounting policy developments 73 9. general outlook 88 10. risks and risk management 91 11. definitions and reconciliations 109 consolidated financial statements and notes management’s reports 113 auditors’ reports 114 consolidated financial statements 116 notes to consolidated financial statements 121 additional investor resources glossary 170 investor information 172 telus.com/investors 177 CFO letter to investors a passion for GROWTH Dear investor, Through 2010, TELUS generated improving financial and operational performance that has propelled us forward and positions us well for the coming year. It is gratifying to see our investors being rewarded for believing in our Company’s ability to deliver on our proven strategy and benefit from our consistent financial policies.

Financial performance – past and future additions and improved growth in high-speed Internet service. TELUS’ financial performance in 2010 and targets for 2011 Particularly important was the trend in wireless average revenue reflect the many positive trends in both wireless and wireline, per unit (ARPU), which, due to the growing popularity of high- which are being made possible by our major strategic revenue smartphones, improved from a 6.8 per cent decline investments in recent years in broadband networks and in 2009 to a modest 1.4 per cent decline in 2010. Ongoing operating efficiency. efficiency savings, combined with lower restructuring costs, Growth resumed in 2010, with revenue increasing from also contributed to the improvement in EBITDA. 2009 by two per cent to $9.8 billion and EBITDA up over four Underlying earnings per share (EPS) growth was 15 per per cent to $3.6 billion. These results are made possible by cent, after adjusting for non-operational items. This primarily past investments and are being driven by increases in business reflected increased EBITDA, as well as reductions in financing volumes, including more wireless subscribers, record Optik TV costs that resulted from the lower costs of borrowing on CONSOLIDATED AND SEGMENTED 2011 TARGETS

Revenues EBITDA Earnings per share Capital (EPS) – basic expenditures $9.925 to $3.675 to approximately $10.225 billion $3.875 billion $3.50 to $3.90 $1.7 billion 1 to 4% 1 to 6% 7 to 19%

Wireless revenues Wireless EBITDA Wireline revenues Wireline EBITDA

$5.2 to $2.15 to $4.725 to $1.525 to $5.35 billion $2.25 billion $4.875 billion $1.625 billion 4 to 7% 6 to 11% (1) to 2% (6) to 0%

$2 billion of debt refinancing completed in the past two years successfully over the past decade as we executed our and a lower overall level of debt. operational strategy while building financial strength and thereby Free cash flow increased by 95 per cent to $947 million earned the confidence of investors. Our track record is also in 2010, reflecting both growth in earnings and a significant reflected in the strong investment grade credit ratings we $380 million decline in capital expenditures. Notably, our strong maintain, BBB+ to A– with a stable trend, which have enabled cash flow position enabled us to make a voluntary $200 million us to have ready access to capital markets. contribution in January 2011 to our defined benefit pension We continued in 2010 to refinance and early redeem U.S. plans, with positive impacts to our expected earnings and our debt due in June 2011 carrying an effective interest rate already strong pension funding position. The benefits from of 8.5 per cent. In July, we successfully raised $1 billion of the contribution include reductions in our pension expense 10-year debt with a 5.05 per cent coupon. This mirrored in 2011 and our cash taxes in 2010 and 2011. the same amount and coupon of a December 2009 debt issue. Indicative of the Company’s momentum are the 2011 ranges The combined impact of these two bond issues would be to and growth rates for consolidated and segmented targets lower annual interest costs by more than $65 million, which shown in the illustration above. I had more comfort setting these will positively impact future earnings and cash flow. Importantly, targets in December 2010 than a year earlier, due to the fourth these debt issues also reduced our refinancing risk and quarter exit rate on wireless ARPU – a 1.9 per cent increase extended our debt maturity profile by almost two-thirds of compared to a 7.7 per cent decline in 2009. However, one can a year to 5.7 years. never get too comfortable in our industry, with key uncertainties Our good standing and ready access to capital markets in 2011 that include the magnitude of the impact from new provide a competitive advantage in our ever-changing, technology- wireless entrants and regulatory developments. These targets driven and capital-intensive industry. This is increasingly should be read in conjunction with the important assumptions important as we continue to invest in new network infrastructure and caution regarding forward-looking statements contained and innovative solutions. in Management’s discussion and analysis (MD&A). Based on targeted EBITDA growth, as well as lower Considering interests of equity financing costs and much lower cash taxes, free cash flow and debt holders is also expected to increase notably in 2011. TELUS continues its long-standing orientation to manage capital in a manner that considers the interests of equity and Strong financial management debt holders, and optimizes the cost and availability of capital TELUS has considerable financial strength and a demonstrated at an acceptable level of risk. We have acted to maintain our commitment to transparency and adherence to prudent finan­ strong credit ratings and 2010 represents the sixth consecutive cial policies and guidelines. These have guided our actions year that we have achieved our long-term financial policy

28 . TELUS 2010 annual report on net debt to EBITDA of 1.5 to 2.0 times. At the same time, Institute of Chartered Accountants (CICA) recognized TELUS we have continued to return cash to our shareholders once core for our comprehensive 2009 shareholder information package investments have been made. with the following awards: TELUS’ dividend payout ratio guideline was increased .. Overall Award of Excellence for Corporate Reporting, by the Board of Directors in May 2010 to 55 to 65 per cent of CICA’s highest award in Canada sustainable net earnings on a prospective basis. This signalled .. Honourable Mention (second best) for Excellence confidence in the outlook for the Company’s earnings and in Corporate Governance Disclosure cash flow, moderating capital expenditures, and aligned with .. Honourable Mention for Excellence in Sustainable our dividend growth model. In 2010, the Company announced Development Reporting. two dividend increases of five per cent each, taking the current dividend to a record high of $2.10 annually. From a position of strength Indicative of our strong cash flow position, commencing in Our commitment to clearly set and stick to our financial policies March 2011, we are reducing share dilution by purchasing shares has been a mainstay of our financial management approach in the open market under our dividend reinvestment and share for more than a decade. While it has taken courage to stand firm purchase program, rather than issuing shares from treasury. on these policies, especially during times of market exuberance and economic downturns, our resolve has been rewarded. Other developments The result is evident in our strong financial position, successful On January 1, 2011, TELUS, along with most other public access to the credit markets even during the recent recession, companies in Canada, began reporting in accordance with and the excellent total shareholder return of 40 per cent in 2010. International Financial Reporting Standards (IFRS). Previously, We enter 2011 from a position of financial strength that we reported in accordance with Canadian generally accepted we believe will help us meet upcoming challenges and exciting accounting principles (GAAP). Due to a comprehensive and, opportunities in the fast-moving communications industry. as we have been advised, well-executed changeover plan, the Building on the momentum created in 2010, we are confident transition was smooth. Quantified impacts on financial state­ in our prospects for the future as we strive to create value ment line items and other measures from the first-time adoption for our investors. of IFRS are outlined in Section 8.2 of the MD&A. Notably, the pro forma 2010 EPS per IFRS was very similar to GAAP, Sincerely, with a minimal increase of $0.04, a one per cent change. With a number of key regulatory developments currently in progress, TELUS is anticipating that additional information and decisions will likely be issued in 2011 by Industry Canada Robert McFarlane and the CRTC. We believe these decisions must be made Executive Vice-President and in a carefully considered and transparent manner, with suffi­ Chief Financial Officer cient notice for stakeholders. To effectively make significant February 24, 2011 strategic investment decisions, communications companies need reasonable certainty and a timeframe that allows for a return on the billions of dollars invested in bringing broadband IP and wireless network infrastructure and the latest innovations to consumers.

Pursuing excellence in disclosure, social responsibility and governance At TELUS, we firmly believe in the importance of full and fair disclosure. As well, we strive to ensure our business decisions are made using a triple bottom line approach, which balances business, social and environmental impacts based on a foundation of excellence in corporate governance. Our efforts continue to gain external recognition. TELUS was recognized for having the best financial reporting at the 2011 IR Magazine Canada awards. Also, in late 2010, the Canadian corporate governance COMMITTED TO INTEGRITY

TELUS’ commitment to best practices in corporate governance and full and fair financial disclosure is integral to what we do. We continue to pursue greater transparency and seek innovative ideas for improvement to help us remain a governance leader.

Enhancing best-in-class governance .. Enhancing Board oversight of key enterprise risks and At TELUS, we take a proactive approach to corporate conducting an explicit and formal review of the implications of governance and reporting, often going beyond what is required the executive compensation program for executive risk-taking, and, where optimal, early adopting emerging best practices. as part of TELUS’ robust risk management approach The result has been a series of initiatives across the company .. Being one of the first Canadian companies to voluntarily adopt that further the effective management of TELUS and help a say-on-pay and shareholder engagement policy, which increase investor confidence. Some of the new initiatives put provides shareholders with a non-binding vote on executive in place in 2010 include: compensation, with the first vote to be held this May .. Introducing, as part of our shareholder engagement policy, a communication tool to increase direct engagement between the Board and shareholders outside of the annual meetings. You can contact the Board on shareholder matters by emailing [email protected] .. Evolving the format of the annual Board strategic advance meeting to provide more time for interactive discussions between the Board and senior management, by adopting a fireside chat and panel discussion format facilitated by specific directors.

Having the courage to lead with voluntary practices With our proactive approach to corporate governance, our voluntary practices often surpass what is legally required for the benefit of our investors. Some of these practices include: .. Having a majority voting policy for the election of directors .. Continuously improving our innovative enterprise risk governance program by: .. Expanding, for the first time, our internal risk assessment survey to Board members, who assessed our overall risk approach as being leading-edge based on their experience .. Assessing perceptions of risk resiliency, appetite and tolerance, including risk management integration in key decision processes .. Having the Audit Committee approve the 2011 Internal Audit program

30 . TELUS 2010 annual report .. Receiving the highest rating in an external quality assurance fraud by team members with a significant role in internal controls review of TELUS’ Internal Audit function over financial reporting. Of all complaints made to our Ethics .. Securing independent third-party verification of select Office since it began in 2003, no breaches of the ethics policy infor ­mation in the TELUS corporate social responsibility report have involved fraudulent financial reporting. .. Complying with the independence definition provisions of For the first time, in 2010, we conducted an ethical climate the New York Stock Exchange (NYSE) governance standards survey among team members. Results were positive, indicating .. Sharing publicly our policies on corporate disclosure and our program is effective in fostering an ethical and respectful insider trading at telus.com/governance, as well as the workplace for all team members. entire Board policy manual including all Board committees’ terms of reference. Communicating with investors As part of our commitment to transparency, we actively Ensuring integrity in the workplace com­municate with investors, providing them with timely and At TELUS, we take a holistic and proactive approach to promoting relevant information to help them make informed decisions. integrity and striving to ensure team members adhere to the In 2010, TELUS participated in many investor activities, including highest level of ethical behaviour. five webcast conference calls and three industry conference In 2010, we updated our ethics policy to ensure it remained presentations, two of which were publicly webcast. To view relevant for team members. We also updated our mandatory these and upcoming events, visit telus.com/investors. TELUS online course by adding new content, streamlining the information executives also conducted many meetings with more than and enhancing interactivity. The TELUS Integrity 2010 course 200 investors in major cities in Canada and the United States. incorporated the key points of TELUS’ ethics, respectful work- We took an innovative approach to some of these meetings place, corporate security and privacy policies. The course was by using Cisco Telepresence, a high-definition video-conferencing extended to include TELUS contractors and, by early 2011, service, between certain TELUS locations across Canada. This had been successfully completed by all team members. In 2011, approach enables meetings to happen more quickly and reduces we plan to introduce a supplier code of conduct that will outline travel expenses and time. We also con­ducted 14 Optik TV certain key expectations. service demonstrations in the Vancouver and Toronto TELUS We continued to provide the Ethics Line for anonymous Innovation Centres to give a hands-on experience with the and confidential questions or complaints on accounting, internal superior entertainment features we are offering clients. controls or ethical issues, and enhanced the interactive tools available for users. Calls are handled by an independent agency Innovation is paying off 24 hours a day, offering multi-language services to internal Throughout the year, we continued to gain recognition for our and external callers. good governance practices. TELUS was recognized for having In 2010, 388 calls were received by the Ethics Line, 304 the sixth best annual report in the world by the Annual Report of which involved advice on ethical situations or complaints. on Annual Reports in an international review. Our shareholder Each complaint was investigated, resolved appropriately and information package was ranked as the best in Canada by reported to the Audit Committee. The Ethics Office determined the Canadian Institute of Chartered Accountants in its annual that 96 breaches of the policy occurred, but none involved corporate reporting awards.

Scan this mobile barcode or visit telus.com/governance for a full statement of TELUS’ corporate governance practices, including disclosure regarding our governance practices compared to those required by the NYSE, or refer to the 2011 TELUS information circular. New to mobile barcodes? See the inside back cover for information. ANNUAL CONSOLIDATED FINANCIALS

Consolidated

Statement of income (millions) 2010 2009 2008 2007 2006 2005 2004 2003 Operating revenues $ß 9,779 $ß 9,606 $ß 9,653 $ß 9,074 $ß 8,681 $ß 8,143 $ß 7,581 $ß 7,146 Operations expense1 6,062 5,925 5,815 5,465 4,998 4,769 4,413 4,277 Restructuring costs 74 190 59 20 68 54 53 28 EBITDA 3,643 3,491 3,779 3,589 3,615 3,320 3,115 2,841 Depreciation and amortization 1,735 1,722 1,713 1,615 1,576 1,624 1,643 1,653 Operating income 1,908 1,769 2,066 1,974 2,039 1,696 1,472 1,188 Other expense, net 32 32 36 36 28 18 9 23 Financing costs before debt redemption loss 458 433 463 440 505 590 613 640 Debt redemption loss 52 99 – – – 33 – – Income before income taxes 1,366 1,205 1,567 1,498 1,506 1,055 850 525 Income taxes 328 203 436 233 353 330 264 181 Net income $ß 1,038 $ß 1,002 $ß 1,131 $ß 1,265 $ß 1,153 $ 725 $ 586 $ 344

Net income attributable to common shares and non-voting shares $ß 1,034 $ 998 $ß 1,128 $ß 1,258 $ß 1,145 $ 717 $ 580 $ 337

Share information2 2010 2009 2008 2007 2006 2005 2004 2003

Average shares outstanding – basic (millions) 320 318 320 332 344 357 355 349

Shares issued (millions) 4 – – – 4 12 9 6

Shares repurchased (millions) – – 7 14 16 21 2 –

Year-end shares outstanding (millions) 322 318 318 324 338 350 359 352 Earnings per share – basic $ß 3.23 $ß 3.14 $ß 3.52 $ß 3.79 $ß 3.33 $ß 2.01 $ß 1.63 $ß 0.97 Dividends declared per share 2.00 1.90 1.825 1.575 1.20 0.875 0.65 0.60

Financial position (millions) 2010 2009 2008 2007 2006 2005 2004 2003 Capital assets, at cost 3 $ß35,100 $ß34,357 $ß32,581 $ß30,129 $ß28,661 $ß27,456 $ß26,632 $ß25,778 Accumulated depreciation and amortization3 22,244 21,480 20,098 19,007 17,679 16,514 15,411 14,215 Total assets 19,599 19,219 19,021 16,849 16,522 16,208 17,791 17,398 Net debt 4 6,869 7,312 7,286 6,141 6,278 6,294 6,628 7,871 Total capitalization5 15,088 14,959 14,524 13,100 13,253 13,190 13,650 14,371 Long-term debt 5,313 6,090 6,348 4,584 3,475 4,616 6,300 6,571 Owners’ equity 8,201 7,575 7,108 6,855 6,975 6,896 7,022 6,500

OPERATING REVENUES AND EBITDA6 MARGIN ($ billions and %) BASIC EARNINGS AND DIVIDENDS PER SHARE ($)

10 37.3 9.8 10 2.00 3.23 09 36.3 9.6 09 1.90 3.14 08 39.1 9.7 08 1.825 3.52 07 41.4 9.1 07 1.575 3.79 06 41.6 8.7 06 1.20 3.33 05 40.8 8.1 05 0.875 2.01 04 41.1 7.6 04 0.65 1.63 03 39.7 7.1 03 0.60 0.97 EBITDA margin (%) dividends per share

32 . TELUS 2010 annual report QUARTERLY CONSOLIDATED FINANCIALS

Consolidated

Statement of income (millions) Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 Operating revenues $ß2,551 $ß2,455 $ß2,398 $ß2,375 $ß2,443 $ß2,411 $ß2,377 $ß2,375 Operations expense 1,672 1,501 1,460 1,429 1,577 1,456 1,451 1,441 Restructuring costs 32 17 19 6 77 32 53 28 EBITDA 847 937 919 940 789 923 873 906 Depreciation and amortization 443 432 407 453 441 430 424 427 Operating income 404 505 512 487 348 493 449 479 Other expense, net 11 7 6 8 10 6 11 5 Financing costs 102 130 114 112 131 101 106 95 Debt redemption loss – 52 – – 99 – – – Income before income taxes 291 316 392 367 108 386 332 379 Income taxes 64 69 96 99 (48) 106 88 57 Net income $ 227 $ 247 $ 296 $ 268 $ 156 $ 280 $ 244 $ 322

Net income attributable to common shares and non-voting shares $ 226 $ 246 $ 295 $ 267 $ 155 $ 279 $ 243 $ 321

Share information2 Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009

Average shares outstanding – basic (millions) 322 321 319 318 318 318 318 318

Shares issued (millions) 1 2 1 – – – – –

Shares repurchased (millions) – – – – – – – –

Period-end shares outstanding (millions) 322 321 319 318 318 318 318 318 Earnings per share – basic $ß 0.70 $ß 0.77 $ß 0.92 $ß 0.84 $ß 0.49 $ß 0.88 $ß 0.77 $ß 1.01 Dividends declared per share 0.525 0.50 0.50 0.475 0.475 0.475 0.475 0.475

1 In 2007, the Company introduced a net-cash settlement feature for share option awards granted prior to 2005, which resulted in an incremental pre-tax charge of $169 million for that year. 2 Common shares and non-voting shares. 3 Includes Property, plant, equipment and Intangible assets. 4 The summation of Long-term debt excluding unamortized debt issuance cost, current maturities of Long-term debt, net deferred hedging liability related to U.S. dollar Notes, and proceeds from securitized accounts receivable, less Cash and temporary investments. 5 Net debt plus Owners’ equity excluding accumulated other comprehensive income (loss). 6 The 2007 amount has been adjusted to exclude an incremental charge of $169 million relating to the introduction of a net-cash settlement feature for share option awards granted prior to 2005. Note: Certain comparative information has been restated to conform with the 2010 presentation.

EBITDA ($ millions) DIVIDENDS DECLARED PER SHARE (cents)

Q4 10 847 Q4 10 52.5 Q3 10 937 Q3 10 50 Q2 10 919 Q2 10 50 Q1 10 940 Q1 10 47.5 Q4 09 789 Q4 09 47.5 Q3 09 923 Q3 09 47.5 Q2 09 873 Q2 09 47.5 Q1 09 906 Q1 09 47.5

TELUS 2010 annual report . 33 ANNUAL OPERATING STATISTICS

Consolidated 2010 2009 2008 2007 2006 2005 2004 2003 Cash flow statement information

Cash provided by operating activities (millions) $ß 2,546 $ß 2,904 $ß 2,819 $ß 3,172 $ß 2,804 $ß 2,915 $ß 2,538 $ß 2,134

Cash used by investing activities (millions) (1,707) (2,128) (3,433) (1,772) (1,675) (1,355) (1,300) (1,198) Cash provided (used) by financing activities (millions) (863) (739) 598 (1,369) (1,149) (2,448) (348) (921) Profitability ratios Dividend payout1 65% 61% 54% 47% 45% 55% 49% 62% Return on common equity 2 13.1% 13.4% 16.0% 18.4% 16.6% 10.2% 8.7% 5.4% Return on assets3 13.0% 15.1% 14.8% 18.8% 17.0% 18.0% 14.3% 12.3% Debt and coverage ratios EBITDA interest coverage ratio4 7.3 6.9 8.3 8.2 7.3 5.4 5.2 4.5 Net debt to EBITDA ratio5 1.8 2.0 1.9 1.7 1.7 1.9 2.1 2.7 Net debt to total capitalization 45.5% 48.9% 50.2% 46.9% 47.4% 47.7% 48.6% 54.8% Other metrics

Free cash flow (millions)6 $ 947 $ 485 $ 361 $ß 1,388 $ß 1,443 $ß 1,336 $ß 1,167 $ 776

Capital expenditures (millions) $ß 1,721 $ß 2,103 $ß 1,859 $ß 1,770 $ß 1,618 $ß 1,319 $ß 1,319 $ß 1,253

Payment for wireless spectrum (millions) $ – $ – $ 882 $ – $ – $ – $ – $ – Capex intensity7 18% 22% 19% 20% 19% 16% 17% 18% Capex intensity7 including payment for wireless spectrum 18% 22% 28% 20% 19% 16% 17% 18%

Total customer connections (000s)8 12,253 11,875 11,603 11,111 10,715 10,211 9,716 9,175 Employee-related information

Total salaries and benefits (millions)9 $ß 2,233 $ß 2,303 $ß 2,326 $ß 2,329 $ß 2,028 $ß 1,897 $ß 1,914 $ß 1,859 Total active employees10 34,800 36,400 36,600 34,200 31,900 29,800 25,800 24,700

Full-time equivalent (FTE) employees11 33,900 35,300 35,900 33,400 31,100 n.m. 24,800 23,800

EBITDA per average FTE employee (000s)11,12 $ 109 $ 106 $ 111 $ 117 $ 126 n.m. $ 130 $ 119

RETURN ON COMMON EQUITY (%) FREE CASH FLOW ($ millions)

10 13.1 10 947 09 13.4 09 485 08 16.0 08 361 07 18.4 07 1,388 06 16.6 06 1,443 05 10.2 05 1,336 04 8.7 04 1,167 03 5.4 03 776

34 . TELUS 2010 annual report QUARTERLY OPERATING STATISTICS

Consolidated Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 Cash flow statement information

Cash provided by operating activities (millions)ß $ 696 $ß 913 $ß 523 $ß 414 $ 624 $ 814 $ 852 $ 614

Cash used by investing activities (millions) (559) (452) (389) (307) (513) (585) (552) (478)

Cash used by financing activities (millions) (170) (452) (139) (102) (104) (221) (339) (75) Profitability ratios Dividend payout1 65% 66% 64% 64% 61% 53% 53% 52% Return on common equity 2 13.1% 12.3% 13.0% 12.5% 13.4% 15.3% 15.7% 16.2% Return on assets3 13.0% 12.8% 12.5% 14.2% 15.1% 15.7% 16.8% 14.7% Debt and coverage ratios EBITDA interest coverage ratio4 7.3 5.8 6.7 6.7 6.9 9.0 8.7 8.5 Net debt to EBITDA ratio5 1.8 1.9 1.9 2.0 2.0 1.9 1.9 1.9 Net debt to total capitalization 45.5% 46.0% 47.6% 48.2% 48.9% 48.4% 49.1% 49.6% Other metrics

Free cash flow (millions)6 $ß 121 $ß 339 $ß 241 $ß 246 $ß (50) $ 266 $ 144 $ 125

Capital expenditures (millions) $ß 564 $ß 449 $ß 397 $ß 311 $ 514 $ 558 $ 557 $ 474

Payment for wireless spectrum (millions) $ß – $ß – $ß – $ß – $ – $ – $ – $ – Capex intensity7 22% 18% 17% 13% 21% 23% 23% 20% Capex intensity7 including payment for wireless spectrum 22% 18% 17% 13% 21% 23% 23% 20%

Total customer connections (000s)8 12,253 12,129 11,979 11,893 11,875 11,782 11,691 11,617 Employee-related information

Total salaries and benefits (millions) $ß 555 $ß 563 $ß 561 $ß 554 $ 583 $ 562 $ 590 $ 568

n.m. – not meaningful 1 Last quarterly dividend declared per share, in the respective reporting period, annualized, divided by the sum of Basic earnings per share reported in the most recent four quarters. 2 Common share and non-voting share income over the average quarterly common equity for the 12-month period. Quarterly ratios are calculated on a 12-month trailing basis. 3 Cash provided by operating activities divided by total assets. Quarterly ratios are based on a 12-month trailing cash flow provided by operating activities. 4 EBITDA excluding Restructuring costs, divided by Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. This ratio, adjusted to exclude the loss on redemption of long-term debt, was 7.8 in the fourth quarter of 2010 and 8.5 in the fourth quarter of 2009. 5 Net debt at the end of the period divided by 12-month trailing EBITDA excluding Restructuring costs. 6 EBITDA as reported, deducting donations expense and securitization fees, adjusted for payments in excess of expense for share-based compensation, restructuring activities and defined benefit plans, and deducting cash interest, cash income tax, capital expenditures, payment for wireless spectrum, and before dividends. 7 Capital expenditures divided by Operating revenues. 8 The measure is a sum of wireless subscribers, network access lines, Internet access subscribers and TV subscribers (TELUS Optik TV and TELUS Satellite TV). Historical Network access lines updated for prior periods commencing in 2007. 9 Includes net-cash settlement feature expenses of $169 million in 2007. 10 Excluding employees in TELUS International, total active employees were 26,400 in 2010, 27,700 in 2009, 28,700 in 2008, 27,500 in 2007, 27,100 in 2006, 26,500 in 2005 and 25,800 in 2004. In 2009, TELUS acquired Black’s Photo, which added 1,250 total employees. 11 The measure of FTE employees is not reported for fiscal year 2005, as it does not factor in effective overtime hours on staff equivalents because of the labour disruption. 12 EBITDA excluding Restructuring costs, divided by average FTE employees. For 2007, EBITDA excluded the net-cash settlement feature expense of $169 million. Note: Certain comparative information has been restated to conform with the 2010 presentation.

CAPITAL EXPENDITURES ($ millions) TOTAL CUSTOMER CONNECTIONS (millions)

Q4 10 564 Q4 10 12.3 Q3 10 449 Q3 10 12.1 Q2 10 397 Q2 10 12.0 Q1 10 311 Q1 10 11.9 Q4 09 514 Q4 09 11.9 Q3 09 558 Q3 09 11.8 Q2 09 557 Q2 09 11.7 Q1 09 474 Q1 09 11.6 wireless wireline

TELUS 2010 annual report . 35 ANNUAL SEGMENTED STATISTICS

2010 2009 2008 2007 2006 2005 2004 2003 Wireless segment

Operating revenues (millions) $ß5,047 $ß4,735 $ß4,660 $ß4,291 $ß3,881 $ß3,319 $ß2,833 $ß2,375

Operations expense (millions)1 3,012 2,790 2,647 2,384 2,122 1,874 1,689 1,558

Restructuring costs (millions) 4 12 8 1 6 – – –

EBITDA (millions) $ß2,031 $ß1,933 $ß2,005 $ß1,906 $ß1,753 $ß1,445 $ß1,144 $ 817 EBITDA2 excluding cost of acquisition (COA) (millions) $ß2,629 $ß2,472 $ß2,587 $ß2,495 $ß2,286 $ß1,939 $ß1,580 $ß1,242 EBITDA margin2 40.2% 40.8% 43.0% 45.0% 45.2% 43.5% 40.4% 34.4%

Capital expenditures (millions) $ 463 $ 770 $ 548 $ 551 $ 427 $ 405 $ 355 $ 360

Payment for wireless spectrum (millions) – – $ 882 – – – – –

Cash flow (millions)2,3 $ß1,568 $ß1,163 $ß1,457 $ß1,379 $ß1,326 $ß1,040 $ 789 $ 457 Cash flow2,3 including payment for wireless spectrum (millions) $ß1,568 $ß1,163 $ 575 $ß1,379 $ß1,326 $ß1,040 $ 789 $ 457

Gross additions wireless subscribers (000s) 1,710 1,599 1,655 1,434 1,293 1,279 1,121 987

Net additions wireless subscribers (000s)4 447 406 561 515 535 584 512 431

Wireless subscribers (000s)4,5 6,971 6,524 6,129 5,568 5,056 4,521 3,936 3,424 Wireless market share, subscriber-based 27% 28% 28% 27% 27% 27% 26% 26% Average monthly revenue per subscriber unit (ARPU) $ 58 $ 58 $ 63 $ 64 $ 63 $ 62 $ 60 $ 57

Data ARPU $ 14 $ 12 $ 10 $ 7 $ 5 $ 3 n.a. n.a. Average minutes per subscriber per month 361 392 411 404 403 399 384 350 COA, per gross addition $ 350 $ 337 $ 351 $ 395 $ 412 $ 386 $ 389 $ 430 Monthly churn rate4 1.57% 1.58% 1.57% 1.45% 1.33% 1.39% 1.40% 1.46%

Population coverage – digital (millions)6 33.8 33.1 32.6 31.6 31.0 30.6 30.0 29.5 Wireline segment

Operating revenues (millions) $ß4,920 $ß5,033 $ß5,152 $ß4,924 $ß4,921 $ß4,938 $ß4,866 $ß4,881

Operations expense (millions)1 3,238 3,297 3,327 3,222 2,997 3,009 2,842 2,829

Restructuring costs (millions) 70 178 51 19 62 54 53 28

EBITDA (millions) $ß1,612 $ß1,558 $ß1,774 $ß1,683 $ß1,862 $ß1,875 $ß1,971 $ß2,024 EBITDA margin2 32.8% 31.0% 34.4% 37.1% 37.8% 38.0% 40.5% 41.5%

Capital expenditures (millions) $ß1,258 $ß1,333 $ß1,311 $ß1,219 $ß1,191 $ 914 $ 964 $ 893

Cash flow (millions)2,3 354 225 463 609 671 961 1,007 1,131

Network access lines in service (000s)7 3,739 3,966 4,176 4,333 4,548 4,691 4,808 4,870

High-speed Internet subscribers (000s)8 1,167 1,128 1,096 1,020 917 763 690 562

Dial-up Internet subscribers (000s) 62 87 124 155 194 236 282 320

TV subscribers (000s)9 314 170 78 35 – – – –

WIRELESS SUBSCRIBERS (millions) HIGH-SPEED INTERNET AND TV SUBSCRIBERS (000s)

10 5.7 7.0 10 1,167 1,481 09 5.3 6.5 09 1,128 1,298 08 4.9 6.1 08 1,096 1,174 07 4.5 5.6 07 1,020 1,055 06 4.1 5.1 06 917 05 3.7 4.5 05 763 04 3.2 3.9 04 690 03 2.8 3.4 03 562 postpaid prepaid high-speed Internet subscribers TV subscribers

36 . TELUS 2010 annual report QUARTERLY SEGMENTED STATISTICS

Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 Wireless segment

Operating revenues (millions) $ß1,347 $ß1,290 $ß1,226 $ß1,184 $ß1,232 $ß1,213 $ß1,153 $ß1,137

Operations expense (millions) 871 753 703 685 794 693 656 647

Restructuring costs (millions) – 2 – 2 3 3 4 2

EBITDA (millions) $ 476 $ 535 $ 523 $ 497 $ 435 $ 517 $ 493 $ 488

EBITDA excluding COA (millions) $ 660 $ 693 $ 665 $ 611 $ 598 $ 652 $ 618 $ 604 EBITDA margin 35.3% 41.5% 42.7% 42.0% 35.3% 42.6% 42.8% 42.9%

Capital expenditures (millions) $ 192 $ 113 $ 99 $ 59 $ 192 $ 193 $ 189 $ 196

Payment for wireless spectrum (millions) – – – – – – – –

Cash flow (millions)3 $ 284 $ 422 $ 424 $ 438 $ 243 $ 324 $ 304 $ 292 Cash flow 3 including payment for wireless spectrum (millions) $ 284 $ 422 $ 424 $ 438 $ 243 $ 324 $ 304 $ 292

Gross additions wireless subscribers (000s) 475 466 413 356 431 420 402 346

Net additions wireless subscribers (000s) 119 153 124 51 122 125 111 48

Wireless subscribers (000s)5 6,971 6,852 6,699 6,575 6,524 6,413 6,288 6,177 Wireless market share, subscriber-based 27% 28% 28% 28% 28% 28% 28% 28% ARPU $ 58 $ 59 $ 57 $ 56 $ 57 $ 59 $ 59 $ 58 Data ARPU $ 16 $ 15 $ 14 $ 13 $ 13 $ 12 $ 12 $ 11 Average minutes per subscriber per month 352 361 373 359 389 397 402 382 COA, per gross addition $ 388 $ 339 $ 342 $ 322 $ 380 $ 320 $ 311 $ 336 Monthly churn rate 1.72% 1.54% 1.45% 1.55% 1.60% 1.55% 1.55% 1.62%

Population coverage – digital (millions)6 33.8 33.7 33.7 33.7 33.1 32.7 32.7 32.7 Wireline segment

Operating revenues (millions) $ß1,253 $ß1,212 $ß1,221 $ß1,234 $ß1,254 $ß1,239 $ß1,262 $ß1,278

Operations expense (millions) 850 795 806 787 826 804 833 834

Restructuring costs (millions) 32 15 19 4 74 29 49 26

EBITDA (millions) $ 371 $ 402 $ 396 $ 443 $ 354 $ 406 $ 380 $ 418 EBITDA margin 29.6% 33.2% 32.4% 35.9% 28.2% 32.8% 30.1% 32.7%

Capital expenditures (millions) $ 372 $ 336 $ 298 $ 252 $ 322 $ 365 $ 368 $ 278

Cash flow (millions)3 (1) 66 98 191 32 41 12 140

Network access lines in service (000s)7 3,739 3,794 3,845 3,908 3,966 4,019 4,075 4,123

High-speed Internet subscribers (000s)8 1,167 1,149 1,134 1,131 1,128 1,117 1,108 1,105

Dial-up Internet subscribers (000s) 62 68 73 80 87 96 105 114

TV subscribers (000s)9 314 266 228 199 170 137 115 98 n.a. – not available 1 In 2007, the Company introduced a net-cash settlement feature for share option awards granted prior to 2005, which resulted in an incremental pre-tax charge of $24 million for that year for the wireless segment and $145 million for the wireline segment. 2 EBITDA for 2007 excludes the net-cash settlement feature expense of $24 million for the wireless segment and $145 million for the wireline segment. 3 EBITDA less capital expenditures. 4 Includes the impact of TELUS’ analogue network turndown in Q3 2008, which reduced net additions by 27,635. 5 Opening balances for postpaid subscribers and total wireless subscribers for the fourth quarter of 2009 were reduced by 11,000 to reflect prior period reporting adjustments. 6 Includes expanded coverage resulting from roaming/resale and network sharing agreements principally with Bell Canada. 7 Historical Network access lines updated for prior periods commencing in 2007. 8 Opening balances for high-speed Internet subscribers and total Internet subscribers for the second quarter of 2009 were reduced by 5,000 to reflect prior period reporting adjustments. 9 TV subscribers consists of TELUS Optik TV subscribers and TELUS Satellite TV subscribers. Note: Certain comparative information has been restated to conform with the 2010 presentation.

TELUS 2010 annual report . 37 MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)

Caution regarding forward-looking statements

This document contains forward-looking statements about expected and evolution paths; expected future benefits and performance of high- future events and financial and operating performance of TELUS speed packet access plus (HSPA+) dual-cell technology and transition to Corporation (TELUS or the Company, and where the context of the long-term evolution (LTE) wireless technology; successful implementation narrative permits, or requires, its subsidiaries). By their nature, forward- of international roaming agreements; successful deployment and looking statements require the Company to make assumptions, and operation of new wireless networks and successful introduction of new forward-looking statements are subject to inherent risks and uncertainties. products (such as new HSPA+ and tablet devices), new services and There is significant risk that assumptions, predictions and other forward- supporting systems; and successful upgrades of TELUS TV technology); looking statements will not prove to be accurate. Readers are cautioned economic growth and fluctuations (including strength and persistence not to place undue reliance on forward-looking statements as a of the economic recovery in Canada, future interest rates and pension number of factors could cause future performance, conditions, actions performance, funding and expenses); capital expenditure levels in or events to differ materially from the targets, expectations, estimates 2011 and beyond (due to the Company’s wireline broadband initiatives, or intentions expressed. Except as required by law, the Company wireless deployment strategy for future technologies, and any new disclaims any intention or obligation to update or revise any forward- Industry Canada wireless spectrum auctions); financing and debt looking statements, and reserves the right to change, at any time requirements (including ability to carry out refinancing activities); at its sole discretion, its current practice of updating annual targets regulatory approvals and developments (including the incumbent local and guidance. Targets for 2011 and assumptions are described exchange carriers’ (ILECs’) obligation to serve; interpretation and in Section 1.5 of Management’s discussion and analysis. application of tower sharing and roaming rules; the design and impact of future spectrum auctions (including the cost of acquiring the spectrum); Factors that could cause actual performance to differ materially the possibility of Industry Canada changing annual spectrum fees include, but are not limited to: in the future; and possible changes to foreign ownership restrictions); Competition (including the Company’s ability to offer an enhanced human resource developments (including collective bargaining and customer service experience; more active price and brand competition; potential for work interruptions related to a national collective agreement the expectation that new wireless competitors will launch or expand that expired in November 2010, as well as employee retention and services in 2011 using advanced wireless services (AWS) spectrum; engagement matters); ability to successfully implement cost reduction industry growth rates including wireless penetration gain; actual network initiatives and realize expected savings, net of restructuring costs access line losses; subscriber additions experience for wireless, (such as from business integrations, business process outsourcing, TELUS TV® and Optik High SpeedTM Internet services; variability in wire- internal off-shoring and reorganizations, without losing customer focus less average revenue per subscriber unit per month (ARPU) as well as or negatively impacting client care); process risks (including conversion variability in subscriber acquisition and retention costs that are dependent of legacy systems and billing system integrations, and implementation on subscriber loading and retention volumes, smartphone sales and of large enterprise deals that may be adversely impacted by available subsidy levels; TELUS TV subscriber volumes, costs of acquisition and resources and degree of co-operation from other service providers); retention; and risk from increasing vertical integration by competitors into tax matters; health, safety and environmental developments; litigation broadcast content ownership); technological substitution (contributing and legal matters; business continuity events (including human-caused to reduced utilization and increased commoditization of traditional wire- and natural threats); any future acquisitions or divestitures (including line voice local and long distance services, and increasing numbers realizing expected strategic benefits); and other risk factors discussed of households that have only wireless telephone services; and over-the- herein and listed from time to time in TELUS’ reports and public top IP services that may cannibalize TV and entertainment services); disclosure documents including its annual report, annual information technology (including subscriber demand for data that could challenge form, and other filings with securities commissions in Canada (on wireless network capacity, service levels and spectrum capacity in SEDAR at sedar.com) and in its filings in the United States, including future; reliance on systems and information technology, broadband and Form 40-F (on EDGAR at sec.gov). wireless technology options and roll-out plans; choice of suppliers and For further information, see Section 10: Risks and risk management suppliers’ ability to maintain and service their product lines; wireless in Management’s discussion and analysis. handset supplier concentration and market power; expected technology

38 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS

February 24, 2011 The following sections are a discussion of the consolidated financial position and financial performance of TELUS Corporation for the years ended December 31, 2010 and 2009, and should be read together with TELUS’ audited Consolidated financial statements dated December 31, 2010. This discussion contains forward-looking information qualified by reference to, and should be read together with, the Caution regarding forward-looking statements.

TELUS’ Consolidated financial statements have been prepared in TELUS’ Consolidated financial statements include the accounts of accordance with Canadian generally accepted accounting principles the Company and all of the Company’s subsidiaries, of which the principal (GAAP), which differ in certain respects from U.S. GAAP. See Note 23 one is TELUS Communications Inc. (TCI). Currently, through the TELUS to the Consolidated financial statements for a summary of the prin- Communications Company partnership and the TELE-MOBILE COMPANY cipal differences between Canadian and U.S. GAAP as they relate to partnership, TCI includes substantially all of the Company’s wireline TELUS. All amounts are in Canadian dollars unless otherwise specified. segment’s operations and all of the wireless segment’s operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS CONTENTS

Section Page Section Page

INTRODUCTION 40 LIQUIDITY AND CAPITAL RESOURCES 66 1 A summary of TELUS’ consolidated results 7 A discussion of cash flow, liquidity, credit for 2010, performance against 2010 targets, facilities and other disclosures and presentation of targets for 2011

CORE BUSINESS AND STRATEGY 47 CRITICAL ACCOUNTING ESTIMATES 73 2 A discussion of TELUS’ core business 8 AND ACCOUNTING POLICY and strategy, including examples DEVELOPMENTS of TELUS’ activities in support of its Accounting estimates that are critical six strategic imperatives to determining financial results; and a summary of differences arising because of the convergence of Canadian GAAP KEY PERFORMANCE DRIVERS 48 with International Financial Reporting 3 A report on 2010 corporate priorities Standards as issued by the International and an outline of 2011 priorities Accounting Standards Board (IFRS-IASB), including unaudited pro forma quantified transition effects

CAPABILITIES 50 GENERAL OUTLOOK 88 4 Factors that affect the capability to execute 9 Expectations for the telecommunications strategies, manage key performance industry in 2011 drivers and deliver results

DISCUSSION OF OPERATIONS 55 RISKS AND RISK MANAGEMENT 91 5 A detailed discussion of operating 10 Risks and uncertainties facing TELUS and performance for 2010 how the Company manages these risks

CHANGES IN FINANCIAL POSITION 64 DEFINITIONS AND RECONCILIATIONS 109 6 A discussion of changes in the Consolidated 11 Definitions of operating, liquidity and capital statements of financial position for the year resource measures, including calculation and ended December 31, 2010 reconciliation of certain non-GAAP measures used by management

TELUS 2010 annual report . 39 INTRODUCTION A summary of TELUS’ consolidated results for 2010, performance against 1 2010 targets, and presentation of targets for 2011

The discussion in this section is qualified in its entirety by the Caution Canadian wireless industry revenue and EBITDA growth for 2010 regarding forward-looking statements at the beginning of the MD&A. are estimated at approximately 5% and 3%, respectively, as compared to 3.2% and 3.1%, respectively, in 2009. Increased competitive intensity 1.1 Preparation of the MD&A (including new or re-launched brands from incumbents and market entry The Company’s disclosure controls and procedures are designed or expansion by entrants), new smartphones and an improved economy to provide reasonable assurance that all relevant information is attracted approximately 1.7 million new industry subscribers in 2010, gathered and reported to senior management on a timely basis, so or an approximate 4.4 percentage point increase in penetration to that appropriate decisions can be made regarding public disclosure. approximately 73% of the population. The wireless penetration rate in (See Disclosure controls and procedures in Section 4.4.) Management Canada is expected to further increase in 2011 by between 4.5 and determines whether or not information is material based on whether five percentage points. it believes a reasonable investor’s decision to buy, sell or hold securities The Canadian wireline sector is expected to continue to face pres- in the Company would likely be influenced or changed if the information sure on legacy voice services from strong competitive intensity and were omitted or misstated. The MD&A and the Consolidated financial technological substitution to growing data and wireless services. Growth statements were reviewed by TELUS’ Audit Committee and approved opportunities remain in wireline data, including Internet, and IP-based TV by TELUS’ Board of Directors. and entertainment services. Management has issued guidance on and reports on certain non-GAAP measures to evaluate performance of the Company and 1.3 Consolidated highlights its segments. Non-GAAP measures are also used to determine ($ millions, unless noted otherwise) compliance with debt covenants and manage the capital structure. Years ended December 31 2010 2009 Change

Because non-GAAP measures do not generally have a standardized Consolidated statements meaning, securities regulations require that non-GAAP measures of income be clearly defined and qualified, and reconciled with their nearest Operating revenues 9,779 9,606 1.8% GAAP measure. The Canadian Institute of Chartered Accountants (CICA) Operating income 1,908 1,769 7.9% Canadian Performance Reporting Board has issued guidelines that Income before income taxes 1,366 1,205 13.4% define standardized earnings before interest, taxes, depreciation and Net income 1,038 1,002 3.6% amortization (EBITDA) and standardized free cash flow. While EBITDA Earnings per share (EPS)(1) and free cash flow discussed in this document are management’s – basic ($) 3.23 3.14 2.9% definitions, reconciliations to the standardized definitions are provided EPS(1) – diluted ($) 3.22 3.14 2.5% in Section 11. Cash dividends declared per share(1) ($) 2.00 1.90 5.3% (1) 1.2 Canadian economy and Average shares outstanding – basic (millions) 320 318 0.6% telecommunications industry Consolidated statements Economic environment of cash flows Canada’s economy grew by an estimated 2.9% in 2010 after contracting Cash provided by operating activities 2,546 2,904 (12.3)% by 2.5% in 2009. The Bank of Canada reported in its January 2011 Cash used by investing activities 1,707 2,128 (19.8)% Monetary Report that it expects Canada’s real gross domestic product Capital expenditures 1,721 2,103 (18.2)% (GDP) growth will be 2.4% in 2011 and 2.8% in 2012. Statistics Canada’s Cash used by financing activities 863 739 16.8% December 2010 Labour Force Survey reported the unemployment rate at 7.6%, down from a revised 8.5% in December 2009. Other measures Subscriber connections(2) (thousands) 12,253 11,875 3.2% EBITDA(3) 3,491 4.4% Telecommunications industry 3,643 Free cash flow(3) 947 485 95.3% The Company estimates that Canadian telecommunications industry Net debt to EBITDA – excluding revenue growth was approximately 2% in 2010, as compared to approxi- restructuring costs (times)(4) 1.8 2.0 (0.2) mately 1% in 2009. The engines of industry growth were wireless and wireline data services, which more than offset declining revenues (1) Includes Common Shares and Non-Voting Shares. (2) The sum of wireless subscribers, network access lines (NALs), Internet access from legacy wireline voice services and pricing pressures on wireless subscribers and TELUS TV subscribers (Optik TV TM and TELUS Satellite TV® voice revenues. subscribers), measured at the end of the respective periods based on information in billing and other systems. NALs at December 31, 2009, reflect prior period restatements made in the first quarter of 2010. (3) EBITDA and free cash flow are non-GAAP measures. See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA) and Section 11.2 Free cash flow. (4) See Section 7.4 Liquidity and capital resource measures and Section 11.4 Definitions of liquidity and capital resource measures.

40 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 1

Highlights from operations, including results for 2010, or measures Analysis of Net income as at December 31, 2010, compared to the same periods in 2009: Years ended December 31 . Consolidated Operating revenues increased by $173 million in 2010 ($ millions) 2010 2009 Change when compared to 2009. In 2010, TELUS’ wireless revenues were Net income 1,038 1,002 36 greater than wireline revenues for the first time. In addition, TELUS’ Add back after-tax loss wireline data revenue exceeded the total of its legacy wireline voice on redemption of debt 37 69 (32) local and long distance revenues for the first time. Consolidated Deduct net favourable income revenues in 2010 were the highest ever recorded by TELUS. tax-related adjustments, Blended wireless average revenue per subscriber unit per month including related interest (ARPU) for 2010 was $57.64, reflecting a more moderate annual income (see Section 5.2) (30) (165) 135 decrease of 1.4% in 2010 as compared to the 6.8% decrease in 2009. Net income before above Notably, wireless ARPU was $58.48 in the fourth quarter of 2010, items (approximate) 1,045 906 139 reflecting the first year-over-year increase in quarterly ARPU since the second quarter of 2007. . Basic earnings per share (EPS) was $3.23 in 2010, or an increase . Subscriber connections increased by 378,000 in 2010. This includes of nine cents per share from 2009. When adjusted to exclude losses 6.9% growth in wireless subscribers, 85% growth in TELUS TV on redemption of debt of approximately 12 cents per share in 2010 subscribers and a 1.2% increase in total Internet subscribers, partly and 22 cents per share in 2009, and favourable income tax-related offset by a 5.7% decrease in total network access lines. adjustments in both years (see Section 5.2), underlying earnings per Smartphones represented 46% of postpaid gross additions share increased by approximately 42 cents in 2010. in the fourth quarter of 2010, compared to 25% in the fourth quarter . Quarterly cash dividends declared in 2010 were $0.475 in the first of 2009, as the Company continued to experience strong smart- quarter, $0.50 in both the second and third quarters, and $0.525 in phone growth driven by iPhone, BlackBerry and Android devices. the fourth quarter for a total of $2.00 in 2010, or an increase of 5.3% At December 31, 2010, wireless subscribers with smartphones from 2009. On February 8, 2011, the Board of Directors declared represented 33% of the postpaid subscriber base as compared to a quarterly dividend of $0.525 (52.5 cents per share) on the issued 20% one year earlier. Wireless monthly subscriber churn increased and outstanding Common Shares and Non-Voting Shares of the to 1.72% in the fourth quarter of 2010, as compared to 1.60% in Company, payable on April 1, 2011, to shareholders of record at the the same period in 2009, as a result of increased competitive intensity close of business on March 11, 2011. from incumbents and new entrants. For the full year, monthly sub- . Average shares outstanding – basic increased primarily from the scriber churn was 1.57% as compared to 1.58% in 2009. issue of TELUS Non-Voting Shares under the dividend reinvestment Newly branded Optik TV service and Optik High Speed Internet and share purchase (DRISP) program, beginning with the January 4, service were launched in June 2010, which, combined with improved 2010, dividend payment. The DRISP participation rate increased bundle offers, contributed to the record 144,000 TELUS TV sub- to approximately 32% in January 2011 as compared to approximately scriber additions in 2010. It also contributed to improved high-speed 14% in January 2010. Effective March 1, 2011, the Company will Internet subscriber additions and reduced losses in residential no longer issue shares from treasury at a 3% discount for reinvested access lines in the second half of 2010. dividends under the DRISP, and will switch to purchasing shares . Operating income increased by $139 million in 2010 when compared from the open market with no discount. to 2009, mainly due to higher EBITDA, slightly offset by increased Liquidity and capital resources highlights, including results for 2010, amortization expenses. or measures as at December 31, 2010, compared to the same periods . EBITDA increased by $152 million primarily from wireless growth in 2009: and lower restructuring costs. Increased TELUS TV costs associated . TELUS had unutilized liquidity of more than $1.9 billion at December 31, with the growing subscriber base were largely offset by realization 2010, consistent with its objective of generally maintaining more than of wireline operating efficiencies. $1 billion of unutilized liquidity. . Income before income taxes increased by $161 million in 2010 . Net debt to EBITDA (excluding restructuring costs) at December 31, when compared to 2009. The increase resulted from higher Operating 2010, was 1.8 times, an improvement from 2.0 times at December 31, income and lower net financing costs, including lower charges 2009, and within the Company’s long-term target policy range of associated with the early partial redemption of long-term debt, partly 1.5 to 2.0 times. Contributing to the improvement was the $443 million offset by lower interest income from the settlement of prior years’ or 6% decrease in net debt as detailed in Section 7.4. tax matters. . Cash provided by operating activities decreased by $358 million in . Net income increased by $36 million in 2010 when compared to 2010 when compared to 2009. The decrease reflects a comparative 2009. Higher income before income taxes and lower blended statutory reduction in securitized proceeds from accounts receivable, lower income tax rates were partly offset by other income tax items (see interest received and higher income taxes paid, partly offset by lower Section 5.3). Excluding favourable income tax-related adjustments interest payments. and charges for the early partial redemption of U.S. dollar Notes . Cash used by investing activities decreased by $421 million in 2010 and termination of related cross currency interest rate swaps, under- when compared to 2009. The decrease was primarily due to higher lying Net income increased by $139 million, or 15%, in 2010 when capital investment levels in 2009 to build out the Company’s wireless compared to 2009, as shown. HSPA+ network and service capability for the November 2009 launch.

TELUS 2010 annual report . 41 . Cash used by financing activities increased by $124 million in 2010 expected, reflecting a shortfall from wireline sales growth and ongoing when compared to 2009, mainly due to refinancing activities and erosion in legacy voice services. Achievement of the consolidated debt reduction. EBITDA and earnings targets reflects strong wireless performance and In 2010, the Company extended the average term to maturity on the realization of benefits from strategic investments in broadband its long-term debt to 5.7 years from five years at December 31, 2009, networks and operating efficiency initiatives. through two key financing activities: (i) a $1 billion 10-year, 5.05% TELUS provided revised public guidance on August 6, 2010, to reflect Note issue in July; and (ii) use of the Note proceeds in September lower expected consolidated and wireline revenue. On November 5, to early redeem U.S.$607 million, or approximately 45%, of its then the Company further revised public guidance for an expected increase outstanding U.S. dollar 8% Notes due June 1, 2011, and terminate in the lower end of the range for consolidated EBITDA and earnings associated cross currency interest rate swaps. The U.S. dollar debt per share, as well as higher endpoints for the wireless EBITDA range. has an effective yield of approximately 8.5%. This partial redemption The guidance revisions were achieved. and a similar Note issue and early partial redemption in December The following scorecard compares TELUS’ fiscal 2010 performance 2009 have rebalanced the debt maturity profile out over several years to its original targets and presents targets for 2011. As a result of the and reduced the risk of having a concentrated amount of debt convergence of Canadian GAAP with IFRS-IASB (abbreviated as IFRS), coming due in any one year. and TELUS’ changeover to IFRS on January 1, 2011, targets for 2011 . Free cash flow increased by $462 million in 2010 when compared are according to IFRS. Unaudited pro forma IFRS 2010 comparative to 2009. The increase reflected lower interest payments due in part to results are provided for reference. Further discussion of the expected lower early debt redemption payments, as well as improved EBITDA effects of the changeover to IFRS is provided in Section 8.2 Accounting and lower capital expenditures, partly offset by higher income tax policy developments. payments and lower interest income. Targets for 2011 were announced on December 14, 2010. These targets and pro forma comparative results for 2010 are fully qualified by 1.4 Performance scorecard the Caution regarding forward-looking statements at the beginning of The Company announced its public targets for 2010 on December 15, the MD&A, as well as the discussion in Section 8.2. Additional information 2009. Three of four original 2010 consolidated targets and three of four on expectations and assumptions for 2011 are provided in Section 1.5 original 2010 segment targets were achieved or exceeded, as shown Financial and operating targets for 2011, Section 1.6 TELUS segment in the table below. Consolidated and wireline revenues were lower than targets, and Section 9: General outlook.

2010 performance 2011 targets (IFRS-IASB)

2010 unaudited Actual results Original targets pro forma IFRS-based 2011 targets and estimated Scorecards and growth and estimated growth Result comparative results growth over 2010 IFRS

Consolidated Revenues $9.779 billion $9.8 to $10.1 billion ✗ $9.792 billion $9.925 to $10.225 billion 2% 2 to 5% 1 to 4%

EBITDA(1) $3.643 billion $3.5 to $3.7 billion ✓ $3.650 billion $3.675 to $3.875 billion 4% flat to 6% 1 to 6%

EPS – basic(2) $3.23 $2.90 to $3.30 ✓ $3.27 $3.50 to $3.90 3% (8) to 5% 7 to 19% Capital expenditures $1.721 billion Approx. $1.7 billion ✓ $1.721 billion Approx. $1.7 billion (18)% (19)% Wireless segment Revenue (external) $5.014 billion $4.95 to $5.1 billion ✓ $5.014 billion $5.2 to $5.35 billion 6.5% 5 to 8% 4 to 7% EBITDA $2.031 billion $1.925 to $2.025 billion ✓✓ $2.022 billion $2.15 to $2.25 billion 5% flat to 5% 6 to 11% Wireline segment Revenue (external) $4.765 billion $4.85 to $5.0 billion ✗ $4.778 billion $4.725 to $4.875 billion (3)% (1) to 2% (1) to 2% EBITDA $1.612 billion $1.575 to $1.675 billion ✓ $1.628 billion $1.525 to $1.625 billion 3.5% 1 to 8% (6) to 0%

(1) A non-GAAP measure. See Section 11.1 Earnings before interest, taxes, ✓✓ Exceeded target depreciation and amortization (EBITDA) for the definition. ✓ Met target (2) Actual EPS for 2010 includes approximately nine cents for favourable income ✗ Missed target tax-related adjustments and a 12-cent charge for early partial redemption of long-term debt that were not contemplated in the original target for EPS.

42 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 1

The following key assumptions were made at the time the 2010 targets were announced in December 2009.

Assumptions for 2010 original targets Result or expectation for 2010 Ongoing wireline and wireless competition in both business and Confirmed by frequent promotional offers by the primary cable-TV consumer markets competitor in Western Canada (Shaw Communications), a new brand launch (Chatr) by an incumbent wireless competitor (Rogers Communications), and a brand re-launch (Solo) by an incumbent wireless competitor (Bell Canada). Canadian wireless industry market penetration gain of approximately The Company’s estimate is a gain of approximately 4.4 percentage four percentage points for the year (approximately 3.6 percentage points in industry market penetration for 2010, with an increasing points in 2009) proportion from postpaid subscribers associated with growing data usage and smartphone adoption. Increased wireless subscriber loading in smartphones Smartphones represented 46% of postpaid gross additions in the fourth quarter of 2010, compared to 25% in the fourth quarter of 2009. Smartphones represent 33% of the postpaid subscriber base at the end of 2010 compared to 20% at the end of 2009. Reduced downward pressure on wireless ARPU Confirmed by the 1.9% year-over-year increase in wireless ARPU in the fourth quarter of 2010 and 1.4% decrease for the full year of 2010, as compared to decreases of 7.7% and 6.8%, respectively, in the fourth quarter and full year of 2009. New competitive wireless entry in early 2010 following one competitive After its initial launch in Calgary and Toronto in December 2009, Globalive launch in December 2009 (Wind brand) launched in Edmonton and Ottawa in the first quarter of 2010, and Vancouver in the second quarter, and announced that it expects to launch in Victoria in 2011.

Other new entrants began launching services in the second quarter of 2010. Mobilicity launched services in the Toronto area in the second quarter, in Edmonton, Vancouver and Ottawa in the fourth quarter, and in Calgary in early 2011. Public Mobile turned up services in the Toronto and Montreal areas. Quebecor (Videotron brand) launched its services in September 2010, initially in Montreal and Quebec City. Videotron previously offered wireless services in Quebec as a mobile virtual network operator. Shaw Communications stated it expects to begin launching wireless services in early 2012.

In addition, during the third quarter of 2010, one incumbent national competitor launched a new brand and the other incumbent national competitor re-launched one of its brands. In wireline, stable residential network access line losses and Residential access line losses moderated in the second half of 2010 continued competitive pressure in small and medium business when compared to the same period in 2009, due to improved bundle market from cable-TV and voice over IP (VoIP) companies and retention offers. Residential access lines decreased by 8.0% in 2010, resulting from promotional activity by the primary Western cable-TV competitor Shaw for voice and Internet services, particularly in the first half of 2010. Business line losses were 2.9% in 2010 due to increased competition in the small and medium business market and conversion of voice lines to more efficient IP services. See Section 5.4. Continued wireline broadband expansion See Section 2: Core business and strategy. Significant increase in cost of acquisition and retention expenses Wireless cost of acquisition (COA) per gross subscriber addition was for smartphones and TELUS TV loading $350 in 2010, an increase of 3.9% from 2009. Retention spending as a percentage of growing network revenue was 11.6% in 2010, up from 10.9% in 2009.

TELUS TV loading was 144,000 in 2010, an increase of 57% from 2009. TELUS TV programming and other costs have increased, as well, due to the 85% increase in total TV subscribers compared to 2009. EBITDA savings of approximately $135 million from efficiency initiatives Savings of approximately $134 million were realized in 2010. Approximately $75 million of restructuring expenses ($190 million Restructuring charges were $74 million. in 2009)

TELUS 2010 annual report . 43 Assumptions for 2010 original targets Result or expectation for 2010 A blended statutory tax rate of approximately 28.5 to 29.5% The blended statutory income tax rate was 29% and the effective (30.3% in 2009). The expected decrease is based on enacted income tax rate was 24%. changes in federal and provincial income tax rates Cash income taxes peaking at approximately $385 to $425 million Cash income tax payments net of refunds received were $311 million (net $266 million in 2009) due to the timing of instalment payments in 2010, comprised of instalments for 2010 and final payments for the 2009 tax year made in the first quarter, net of $41 million of refunds for the settlement of prior years’ matters. The expectation for the full year was revised to a range of $300 to $350 million on November 5, 2010, and was previously revised to a range of $330 to $370 million on August 6, 2010. A pension accounting discount rate was estimated at 5.75% and Defined benefit pension plan expenses were $28 million in 2010 and subsequently set at 5.85% (140 basis points lower than 2009). are set at the beginning of the year. The Company’s contributions to The expected long-term return of 7.25% is unchanged from 2009 defined benefit pension plans in 2010 were $137 million. A $200 million and consistent with the Company’s long-run returns and its voluntary contribution was announced in mid-December 2010 and future expectations. made in January 2011. See Assumptions for 2011 targets in Section 1.5. . Defined benefit pension plans net expenses were estimated to be $28 million in 2010 (compared to $18 million in 2009), based on projected pension fund returns . Defined benefit pension plans contributions were estimated to be approximately $143 million in 2010, down from $179 million in 2009, largely due to the stock market recovery in 2009 and proposed federal pension reforms.

1.5 Financial and operating targets for 2011 Wireline revenue growth is expected to vary between negative 1% As a result of the convergence of Canadian GAAP with IFRS and TELUS’ to positive 2% in 2011, reflecting data growth in business services and changeover to IFRS on January 1, 2011, targets for 2011 are according residential entertainment services, offset by continued decreases in to IFRS. Further discussion of the expected effects of the changeover to traditional local and long distance service revenues. Wireline EBITDA IFRS is provided in Section 8.2 Accounting policy developments. is expected to decline between zero and 6% as a result of revenue The following assumptions apply to TELUS’ 2011 targets presented declines in higher margin legacy services and continued short-term in Scorecards in the previous section. The 2011 targets and assump- dilutive costs associated with Optik TV subscriber growth. This is being tions were originally announced on December 14, 2010, in the Company’s partially offset by growth from lower margin data services, incremental annual financial targets news release and accompanying investor savings from efficiency activities and a reduction in restructuring costs. conference call. Capital expenditures in 2011 are expected to be similar year-over-year For 2011, TELUS is targeting a consolidated revenue increase over at approximately $1.7 billion. TELUS expects to continue its broadband 2010 of 1 to 4% and an EBITDA increase of 1 to 6%. Revenue and infrastructure expansion and upgrades supporting Optik TV and Internet EBITDA are expected to benefit from TELUS’ continued execution in its services in the top 48 communities in Alberta and B.C., which includes data and wireless operations. The growth rate in EBITDA is potentially completing the overlay of VDSL2 technology. In addition, TELUS expects higher than the growth rate in revenues due to efficiency activities and to continue to enhance wireless network capacity and deploy HSPA+ lower expected restructuring costs. Earnings per share (EPS) are targeted dual-cell technology to increase the manufacturer-rated data download to grow in a range of 7 to 19%, due to operating earnings growth and speed to up to 42 megabits per second (Mbps). lower financing costs. TELUS will continue to focus on cost reduction in 2011, with a planned TELUS wireless revenue is forecast to increase 4 to 7% in 2011 as investment of approximately $50 million in restructuring costs ($74 mil- a result of continued subscriber growth. Growth in loading is expected lion in 2010). TELUS expects to generate approximately $50 million in to benefit from a wireless industry penetration gain of approximately incremental operating efficiency savings in 2011 related to restructuring 4.5 to five percentage points. TELUS expects to continue to benefit from investments, capital efficiency initiatives and operating efficiency initia- its HSPA+ network investments resulting in increased data and roaming tives made in 2011 or prior periods (approximately $134 million in 2010). revenues helping to offset continued declines in voice ARPU. Wireless TELUS made a $200 million voluntary special contribution to EBITDA is expected to be 6 to 11% higher in 2011, despite the impact on its defined benefit pension plans in January 2011, which is expected to margins of increased investments in customer acquisition and retention. be accretive to 2011 EBITDA and EPS. Pension contributions are tax deductible and are expected to reduce cash taxes in 2010 and 2011 by a total of approximately $57 million.

44 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 1

Consolidated 2011 targets Assumptions for 2011 targets See Caution regarding forward-looking statements at the beginning Ongoing intense wireline and wireless competition in both business of the MD&A. and consumer markets

Continued downward re-pricing of legacy services CONSOLIDAT ED REVENUE ($ millions) Wireless industry penetration of the Canadian population to increase 11 IFRS target 9,925 to 10,225 between 4.5 and five percentage points, with wireless industry subscriber growth to accelerate due to a combination of increased 10 IFRS 9,792 competition, accelerated adoption of smartphones and use of data 1009 C-GAAP 9,779 applications, and the emergence of new types of wireless devices such as tablets 0908 9,606 TELUS wireless domestic voice ARPU erosion offset by increased data 0807 9,653 and international roaming ARPU growth 06 Wireless acquisition and retention expenses to increase due to increased loading of smartphones, including upgrades, and to support ($ millions) a larger subscriber base CONSOLIDAT ED EBITDA

Continued wireline broadband expansion and upgrades supporting 11 IFRS target 3,675 to 3,875 Optik TV and Optik High Speed Internet subscriber revenue growth that 10 IFRS 3,650 offsets the continued erosion in network access line-related revenues A preliminary pension accounting discount rate was estimated at 5.35% 1009 C-GAAP 3,643 and subsequently set at 5.25% (60 basis points lower than 2010) and 0908 3,491 the preliminary expected long-term return was estimated at 7.25% and subsequently set at 7% (25 basis points lower than 2010) 0807 3,779 . Defined benefit pension plans net recovery was set at $34 million EBI06TDA is a non-GAAP measure. A voluntary one-time pension contribution of $200 million made in January 2011 . Defined benefit pension plans contributions including the voluntary EARNINGS PER SHARE ($) contribution are estimated to be $298 million in 2011, up from $137 million in 2010 11 IFRS target 3.50 to 3.90

Efficiency initiatives are expected to result in approximately $50 million 10 IFRS 3.27 in restructuring costs in 2011 ($74 million in 2010). Incremental EBITDA savings for 2011 were initially estimated at approximately $75 million 1009 C-GAAP 3.23 and are currently estimated at approximately $50 million (savings of 0908 3.14 $134 million in 2010) 0807 3.52 A reduction in financing costs of approximately $135 million due to lower debt levels and interest rates 06 Statutory income tax rate of approximately 26.5 to 27.5% (29% in 2010) CONSOLIDAT ED CAPITA L EXPENDITURES ($ millions) Cash income taxes of approximately $130 to $180 million ($311 million in 2010) 11 target approx. 1,700

10 1,721

09 2,103

08 1,859 882 2,741

07General capital expenditures Payment for AWS spectrum licences

06

TELUS 2010 annual report . 45 1.6 TELUS segment targets Intersegment sales are recorded at the exchange value. Segmented The Company’s operating and reportable segments are wireline and information in Note 6 of the Consolidated financial statements is regularly wireless. Segmentation is based on similarities in technology, the techni- reported to the Company’s Chief Executive Officer (the chief operating cal expertise required to deliver the products and services, customer decision-maker). See Section 4.1 Principal markets addressed and characteristics, the distribution channels used and regulatory treatment. competition for additional information on each segment.

Wireless and wireline segments – 2011 targets See Caution regarding forward-looking statements at the beginning of the MD&A.

WIRELESS EXTERNAL REVENUE ($ millions) WIRELINE EXTERNAL REVENUE ($ millions)

11 IFRS target 5,200 to 5,350 11 IFRS target 4,725 to 4,875

10 IFRS 5,014 10 IFRS 4,778

1009 C-GAAP 5,014 1009 C-GAAP 4,765

0908 4,707 0908 4,899

0807 4,632 0807 5,021

06 06

WIRELESS EBITDA ($ millions) WIRELINE EBITDA ($ millions)

11 IFRS target 2,150 to 2,250 11 IFRS target 1,525 to 1,625

10 IFRS 2,022 10 IFRS 1,628

1009 C-GAAP 2,031 1009 C-GAAP 1,612

0908 1, 933 0908 1,558

0807 2,005 0807 1,774

EBI06TDA is a non-GAAP measure. EBI06TDA is a non-GAAP measure.

46 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 2

CORE BUSINESS AND STRATEGY A discussion of TELUS’ core business and strategy, including examples of TELUS’ 2 activities in support of its six strategic imperatives

The discussion in this section is qualified in its entirety by the Caution Focusing relentlessly on the growth markets of data, regarding forward-looking statements at the beginning of the MD&A. IP and wireless TELUS’ wireless revenues exceeded its wireline revenues for the 2.1 Core business first time in 2010. In addition, TELUS’ wireline data revenue exceeded TELUS Corporation is one of Canada’s largest telecommunications its legacy wireline voice revenues for the first time in 2010, reflecting companies, providing a full range of telecommunications products and the growth in data services that has helped mitigate erosion in local and services. The Company is the largest incumbent telecommunications long distance service revenues. provider in Western Canada and also provides data, IP, voice and Combined external wireless revenues and wireline data revenues wireless services to Central and Eastern Canada. TELUS earns the were $7.28 billion (74% of consolidated revenue) in 2010, as compared majority of its revenue from access to, and the use of, the Company’s to $6.85 billion (71% of consolidated revenues) in 2009, an increase telecommunications infrastructure, or from providing products and of $429 million or 6.3%. Growth in aggregate wireless revenues and services that facilitate access to and usage of this infrastructure. wireline data revenue more than offset the $256 million, or 9.3%, decline At December 31, 2010, the Company’s principal subsidiary was in aggregate wireline voice and other revenues in 2010. wholly owned TELUS Communications Inc. (TCI). Partnering, acquiring and divesting to accelerate 2.2 Strategic imperatives the implementation of TELUS’ strategy and focus TELUS’ strategic intent is to unleash the power of the Internet to deliver TELUS’ resources on core business the best solutions to Canadians at home, in the workplace and on the In May 2010, TELUS announced that TELUS Health Space®, powered move. TELUS’ strategy for growth is to focus on its core telecommunica- by Microsoft HealthVault, was available for licensing by healthcare tions business in Canada supported by international contact centre organizations. The platform is a high-security data storage and sharing and outsourcing capabilities. service that enables Canadians to keep all their personal health infor- In 2000, the Company developed six strategic imperatives that mation in an online database for access over any Internet connection. management believes remain relevant. A consistent focus on the impera- TELUS Health Space is the first consumer health platform in Canada tives guides the Company’s actions and contributes to the achievement to gain Canada Health Infoway pre-implementation certification for of its financial goals. Despite the changing regulatory and competitive providing a secure, interoperable application environment and personal environments, management believes the focus on the imperatives health information platform. The Company also announced that 12 continues to position the Company for future growth. leading national healthcare organizations are collaborating with TELUS to embed applications, medical devices and educational materials Building national capabilities across data, IP, voice into TELUS Health Space. and wireless In September, TELUS offered its customers roaming and enhanced TELUS began deployment of wireless HSPA+ dual-cell technology services in Saskatchewan on SaskTel’s new HSPA+ wireless network in 2010, which is expected to double manufacturer-rated maximum through an enhanced network sharing agreement. This development download speeds to up to 42 Mbps when network deployment offers customers, such as those in the natural resources and oil is complete and launched in Canadian cities and towns. Dual-cell sectors, improved wireless speeds and wide geographic coverage capable devices are expected to be commercially available starting of 95% of Saskatchewan’s population, and improves TELUS’ own in March 2011. TELUS’ HSPA+ network and the implementation of business economics. dual-cell technology are expected to provide an optimal future transition to long-term evolution (LTE) technology. Providing integrated solutions that differentiate TELUS The Company substantially completed its wireline ADSL2+ network from its competitors in 2010 in the top 48 communities in Alberta and B.C., offering down- TELUS’ ongoing investment in the expansion of its fibre-optic network load speeds of up to 15 Mbps or more in some areas. The Company has provided the capacity to introduce new home entertainment services has also been deploying VDSL2 technology since 2009 to bring network in B.C. and Alberta. In June 2010, TELUS launched OptikTM, a newly download speeds of up to 30 Mbps to these communities. The VDSL2 branded suite of advanced TV and high-speed Internet services. Optik upgrade is expected to be largely complete by the end of 2011 in these brings together TELUS’ most advanced home services – Optik TV based markets. At December 31, 2010, TELUS’ broadband high-definition (HD) on Microsoft Mediaroom and Optik High Speed with Internet access coverage reached approximately two million or 87% of the homes in speeds of up to 25 Mbps or more that can be accessed anywhere the top 48 communities in Alberta and B.C. in the home with Wi-Fi. TELUS Optik TV provides the capability for cus- TELUS is also continuing to deploy fibre to the home in new tomers to record up to three programs simultaneously from any room residential areas, and fibre to the building in new multi-dwelling units. on a single personal video recorder (PVR) and play them back on any These investments in core infrastructure serve to strengthen the of up to six TVs with a digital set-top box. Optik TV also offers video on Company’s competitive position versus other wireless competitors and demand with DVD-style controls, an on-screen guide with picture-in- cable-TV companies. (See Providing integrated solutions below.) picture browsing, instant channel changing and call display on the TV.

TELUS 2010 annual report . 47 In August, the Company introduced Remote Recording, an integrated scorecard) and approximately 300 fewer FTEs in international operations solution that allows customers to manage PVR recordings using a due to lower business volumes. web-enabled device such as an iPad or certain smartphones, including In May 2010, the Company created TELUS Customer Solutions by the iPhone or BlackBerry. TELUS also introduced the capability for uniting the customer-facing business units, business solutions and con- the Xbox 360 to be used as a set-top box, directly accessing Optik TV sumer solutions, under the leadership of Joe Natale, who was appointed service, integrating gaming and entertainment. Optik was a positive Executive Vice-President and Chief Commercial Officer. The expected factor in lowering residential subscriber losses and increasing high-speed benefits of this reorganization include: (i) increased capability to approach Internet net additions in the second half of 2010. customers as one team with fully co-ordinated sales, marketing and Building on the success of Clear & Simple® rate plans that launched customer care priorities; (ii) enhanced ability to share best practices, in November 2009, which removed system access and carrier 911 fees, learning, programs, competitive strategies and go-to-market activities TELUS introduced a variety of initiatives in 2010 aimed at bringing greater to deliver positive customer experiences; (iii) contributing to operational transparency and simplicity to customers. In June, TELUS introduced efficiencies and cost synergies contemplated in the Company’s 2010 data notifications to warn customers when they are about to exceed restructuring target; and (iv) streamlining interfaces between TELUS their allotted data rate bucket. This helps customers avoid data overage Customer Solutions and business enabling units to facilitate improved charges and better manage their data usage. prioritization of financial and human resources. In November, TELUS launched the new Clear and Simple Device Ongoing efficiency initiatives include: Upgrade program in response to customer demand for more frequent . Simplifying or automating processes device upgrades to keep pace with technological change. Customers . Simplifying organizational structures through consolidation who are in the middle of a contract may upgrade to a new device by of functions and reducing organizational layers, which includes paying an early device upgrade fee, which is equivalent to the unrecov- workforce reductions ered portion of the original handset discount they received when they . Consolidating administrative real estate to create a smaller signed up for service. This in turn closes out their prior contract commit- environmental footprint through mobile working, reducing inter-city ment and allows them to sign up for a new handset at a discounted travel, decreasing number of daily commutes, and reducing use acquisition price. TELUS also introduced a more transparent cancellation of real estate space, which includes vacating certain locations policy for those who have activated or renewed their contract starting . Decommissioning uneconomic products and services on November 21, 2010. If such customers choose to cancel before their . Leveraging both business process outsourcing, and off-shoring term has expired, they will pay the unrecovered handset discount to TELUS’ own international call centres. plus a small fee. These two changes create more transparency about the value and fairness of TELUS’ contracts and fees. Going to the market as one team under a common brand, executing a single strategy Investing in internal capabilities to build a high-performance The creation of TELUS Customer Solutions, described above, is culture and efficient operations contributing to advancing this imperative. The Company is also intensi- TELUS realized approximately $134 million in cumulative operational fying its focus on the client experience with a Customers First initiative efficiency savings in 2010, as compared to its year-ago expectation started in the summer of 2010 based on the many opportunities identified of approximately $135 million. The number of full-time equivalent (FTE) to senior leaders by front-line team members. Additional activities are employees decreased by approximately 1,400 in 2010, with approximately planned for 2011. It is the shared responsibility of all team members to 1,100 fewer domestic FTEs as a result of restructuring initiatives, attri- effect change and continually improve customer service levels. tion and hiring freezes (see Key assumptions in Section 1.4 Performance

KEY PERFORMANCE DRIVERS 3 A report on 2010 corporate priorities and an outline of 2011 priorities

The discussion in this section is qualified in its entirety by the Caution of new regional wireless companies that are launching or expanding regarding forward-looking statements at the beginning of the MD&A. operations. TELUS has been enhancing its competitive position Management confirms or sets new corporate priorities each year since 2008 by way of the new HSPA wireless network, new devices, to both advance TELUS’ long-term strategic priorities and address simplified rate plans, expanded wireless distribution, and the Koodo® near-term opportunities and challenges. One challenge is the entry brand and service.

48 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 3

Corporate priorities 2009 2010 (see Progress, following) 2011 Execute on TELUS’ broadband strategy, Capitalize on the full potential of TELUS’ Deliver on TELUS’ future friendly brand leveraging investments in leading wireline and leading wireless and wireline broadband promise to clients wireless networks to deliver winning solutions networks Optimize TELUS’ leading wireless and wireline for customers Enhance TELUS’ position in the small and broadband networks Increase the efficiency of operations to medium business market Drive market leadership position in small and improve TELUS’ cost structure and economic Ensure TELUS delivers its future friendly® medium business and healthcare markets performance brand promise to clients Continue to improve TELUS’ operational Outpace the competition and earn the Continue to improve TELUS’ operational efficiency to effectively compete and fund patronage of clients through an engaged efficiency to effectively compete in the market future growth TELUS team. and fund future growth Raise TELUS team engagement to the next Increase TELUS team engagement and live level and continue to drive the philosophy of the culture of personal responsibility and “our business, our customers, our community, customer service. our team, my responsibility.”

Corporate priorities for 2010 – Progress Capitalize on the full potential of TELUS’ leading wireless and wireline broadband networks

. Wireless smartphones increased to 33% of TELUS’ postpaid subscriber base at the end of 2010, facilitating growth in wireless data revenues . Wireless data ARPU increased 21% to $14.39 in 2010, largely offsetting the ongoing decline in voice ARPU . Wireless subscribers increased 6.9%, in the face of increasing competitive intensity . TELUS TV subscribers increased 85% to 314,000 at year-end 2010, contributing to the growth in wireline data revenues . Internet subscribers increased 1.2% to 1.23 million at the end of 2010. Enhance TELUS’ position in the small and medium business market

. TELUS increased sales of its integrated small business bundle, TELUS Business One®, which includes connectivity (voice, Internet and email services), security, hosting, audio and video conferencing, and other IP-based tools . In support of Push To TalkTM services on the Mike® network, TELUS introduced the Android-based Motorola i1 touchscreen phone. In addition to providing premium smartphone features, the i1 is built to military specifications and certified for extreme conditions.

Ensure TELUS delivers its future friendly brand promise to clients In 2010, TELUS intensified its focus on delivering an improved customer experience. In June, the Customers First initiative was introduced. It is an innovative program that brought all senior managers to the front line to listen to customers and learn from team members. Initiatives identified, such as an improved interactive voice system and more flexible installation times, are leading to measurable improvements for TELUS’ customers.

As described in Section 2.2 – Providing integrated solutions . Launched the Clear and Simple Device Upgrade program for wireless customers, making it easier to upgrade to the latest wireless smartphones . Introduced data notifications advising wireless customers of potential data overage charges, allowing them to better manage their data usage and cost . Introduced a more transparent cancellation policy for wireless customers who activate or renew their contract after November 21, 2010 . Enhanced the TELUS TV experience with the introduction of Optik TV, improved installation capability, improved availability of high-definition TV channels and PVRs, increasing geographic coverage, marketing of bundled offers, and expanding channel selection. The Company upgraded a significant portion of its existing IP TV subscriber base on older platforms to Microsoft Mediaroom in 2010.

Continue to improve TELUS’ operational efficiency to effectively compete in the market and fund future growth As described in Section 2.2 – Investing in internal capabilities . Realized operating savings of $134 million in 2010 . Restructuring initiatives are expected to contribute to realization of incremental efficiencies of approximately $50 million in 2011. Increase TELUS team engagement and live the culture of personal responsibility and customer service.

. The measure of team member engagement increased by three percentage points in 2010 . The TELUS Work Styles Program seeks to transition the Company’s domestic workforce to as high as 40% mobile workers (in the office three days each week, sharing workstations) by 2015. Of the remaining team members, 30% could work at home and 30% could work in TELUS buildings. The program plans to lower the use of real estate and reduce the Company’s environmental footprint.

TELUS 2010 annual report . 49 CAPABILITIES Factors that affect the capability to execute strategies, manage key 4 performance drivers and deliver results

The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.

4.1 Principal markets addressed and competition

Wireless: National services for consumers and businesses

TELUS capability Competition Licensed national wireless spectrum. Established wireless service competition includes services offered by: Total coverage of 33.8 million, or 99%, of Canada’s population. . Facilities-based national competitors Rogers Wireless and HSPA+ wireless network coverage of 33.1 million or 97% of the population, Bell Mobility, and provincial telecommunications companies facilitated by network sharing agreements with Bell Canada and SaskTel. SaskTel and MTS Mobility Digital HSPA+ network: . Resellers of competitors’ wireless networks, such as 7-Eleven . Launched in November 2009 and certain cable-TV companies. . Manufacturer-rated data download speeds of up to 21 megabits Emerging wireless service competition: per second . Four new entrants offered services in 2010 (see discussion . Dual-cell capability being added with manufacturer-rated download of assumptions in Section 1.4) speeds of up to 42 megabits per second . Other new entrants that acquired advanced wireless services . International roaming to more than 200 countries (AWS) spectrum in 2008 may enter the market in 2011 . Improved capability for international in-roaming revenue, previously and 2012 limited to in-roaming from CDMA and Mike service users, primarily . Potential for alliances and integrations among regional from the U.S. competitors. . Expected to enable an optimal future transition to LTE technology and services.

Mature networks: . Digital PCS (CDMA) network, including a 3G high-speed evolution data optimized (EVDO) Revision A overlay . TELUS’ iDEN network-based Mike service, a Push to Talk service focused on the commercial marketplace.

Interconnection with TELUS’ wireline networks.

Services offered: . Digital voice – postpaid, Pay & Talk® prepaid and Mike all-in-one services, including TELUS Push To Talk® . Data – Web browsing, social networking, text, picture, video and instant messaging, images, ringtones, TELUS mobile TV®, video on demand, TELUS mobile radio®, downloadable music, and the latest wireless mobile applications . Internet – wireless broadband; leading smartphones, mobile Internet keys and tablets; and TELUS Smart Hub mobile Wi-Fi.

50 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 4

Wireline: ILEC residential services in British Columbia, Alberta and Eastern Quebec; and national business services

TELUS capability Competition An IP-based national network overlaying an extensive switched network Substitution of wireless services, including TELUS’ own wireless in incumbent territories in B.C., Alberta and Eastern Quebec. offerings, for local and long distance services. Households with wireless telephone services only (among all providers, including TELUS) are Global interconnection arrangements. estimated to be 18% in B.C. and Alberta. Access to almost every urban and rural home and business in incumbent Cable-TV providers that have access to urban and suburban homes territories in B.C., Alberta and Eastern Quebec. TELUS wireline residential to provide Internet, entertainment and VoIP-based telephony services, access line services are provided to an estimated 54% of households in including: B.C. and Alberta. . Shaw Communications Inc. in B.C. and Alberta Broadband ADSL2+ or VDSL2 coverage reached 2.1 million households . Cogeco Cable in Eastern Quebec. in B.C., Alberta and Eastern Quebec at December 31, 2010. Rogers Communications, Bell Canada and Shaw Communications, Access to businesses in non-ILEC areas through TELUS’ networks, providing combinations of local, long distance, Internet, entertainment competitive local exchange carrier status and leased facilities where required. and wireless services in various regions.

Broadcasting distribution licences to offer digital television services in Various others (e.g. Vonage) that offer resale or VoIP-based local, incumbent territories and licences to offer commercial video-on-demand long distance and Internet services. services. Satellite-based entertainment and Internet services (Bell Canada Services offered: and Shaw Communications). . Voice – reliable phone service with long distance and call management Over-the-top competitors such as Netflix, providing entertainment services services. . Internet – secure OptikTM High Speed Internet service with comprehensive suite of security solutions Competition for voice and data communications for businesses . TELUS TV – HD entertainment service with PVR, Video on Demand includes: and Pay Per View services through Optik TV and TELUS Satellite TV; . Bell Canada, MTS Allstream and cable-TV companies competing Optik TV also offers PVR Anywhere, Remote Recording and use of with their own national infrastructures Xbox 360 as a set-top box . Substitution to wireless services including those offered by TELUS. . IP networks and applications – IP networks that offer converged Competitors for call centre services include Convergys, Sykes and voice, video, data or Internet services on a secure, high-performing Verizon LiveSource. network . Conferencing and collaboration – full range of equipment and application Competitors for customized managed outsourcing solutions include solutions to support meetings using phone, video and the web system integrators CGI, EDS and IBM. . Contact centre outsourcing solutions in English, Spanish and French languages – managed solutions providing secure, stable, low-cost and scalable infrastructure, through locations in North America, Central America and Asia . Hosting and managed IT – ongoing assured availability of telecommuni- cations, networks, servers, databases, files and applications with critical applications stored in TELUS’ intelligent Internet data centres . Healthcare – TELUS Health Solutions provides claims management solutions, hospital-to-home technology, patient records at the point of care, and access to essential drug and medical information through information communication technology . Mortgage processing services.

TELUS 2010 annual report . 51 4.2 Operational resources

Operational resources Operational risks and risk management People At the end of 2010, the Company employed approximately 34,800 TELUS Employee compensation, retention and labour relations risks team members (33,900 FTE) across a wide range of operational functions discussion – See Section 10.4 Human resources. See also domestically and certain functions internationally. Section 10.5 Process risks – foreign operations. . Approximately 12,400 team members are covered by a collective Offshore operations support business process outsourcing services for agreement. The collective agreement with the Telecommunications external customers. The Company also uses offshore services for certain Workers Union, representing approximately 11,000 members, internal operations to improve efficiency and to allow onshore operations expired on November 19, 2010 to focus on value-added services. . TELUS International employs approximately 8,400 team members Employee compensation programs support a high-performance culture and . Retention and hiring issues are expected to remain due to an contain market-driven and performance-based components. increase in the number of competitors The Company expects that it has adequate employee resources to cover . TELUS will continue to focus on other non-monetary factors that ongoing retirements, and ready access to labour in Canada and, for call have a clear alignment with engagement including: performance centres and specific support functions, various locations internationally. management, career opportunities, training and development, TELUS uses a small number of external contractors or consultants. and recognition . Starting in 2010, the Company altered weightings of its performance- The Company has extensive training programs in place. based measures to place greater emphasis on corporate-wide and individual performance.

General safety risks – See Section 10.8 Health, safety and environment. Brand and distribution The Company has a well established and recognizable national brand that Competition – See Section 4.1 above and Section 10.1. is supported by extensive advertising across all media. Industry and economy – See Section 9: General outlook and TELUS successfully launched Optik TV and Optik High Speed Internet Section 10.11 Economic growth and fluctuations. brands in mid-2010. Regulation – See Section 10.3. Regulatory context: Niche market brand CAYATM (come as you are) and stores introduced in late . None of the Wireless segment revenues are currently subject 2010 for lesbian, gay, bisexual and transgender customers among others. to CRTC price regulation . Less than one-quarter of the Company’s revenues are from Koodo Mobile® basic wireless brand and postpaid service introduced in Wireline segment regulated services and subject to CRTC March 2008. price regulation TELUS launched HSPA+ wireless services on November 5, 2009, with . Deregulation of wireline local phone services for residential a wide variety of new smartphones, including the iPhone, BlackBerrys markets covering approximately three-quarters of its residential and many others. land business lines in incumbent areas of B.C., Alberta and Services are summarized in Section 4.1 above. Eastern Quebec . Non-incumbent local exchange carrier (non-ILEC) services, Sales distribution: long distance, Internet, international telecommunications, inter- Wireless services supported through a broad network of TELUS-owned . exchange private line and certain data services, as well as the and branded stores (including Black’s Photo stores), an extensive sale of customer premises equipment, continue to be forborne distribution network of exclusive dealers and large third-party electronics from regulation retailers (e.g. Future Shop / Best Buy, London Drugs) and online . Vertical integration of competitors self-serve applications . Foreign ownership restrictions generally apply to wireless . Business services across wireless and wireline supported through telecommunications companies, as well as to facilities-based both TELUS sales representatives and independent dealers wireline telecommunications companies and to broadcasting . Wireline residential services supported through mass-marketing distribution undertakings campaigns, client care telephone agents and online self-serve . The design of future wireless spectrum auctions, such as for applications. the 700 MHz and 2.5/2.6 GHz ranges, may be unfavourable to incumbents, making the cost of acquiring or availability of future spectrum uncertain.

52 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 4

Operational resources Operational risks and risk management Technology, systems and properties TELUS is a highly complex technology-dependent company with a multitude Technology risks – See Section 10.2. of interconnected wireline and wireless telecommunications networks, IT Process risks – See Section 10.5. systems and processes. Health, safety and environment – See Section 10.8 Network facilities are constructed under or along streets and highways, pur- . Increasing adoption of wireless services and expanding suant to rights-of-way granted by the owners of land such as municipalities wireless competition have resulted in more public scrutiny of, and the Crown, or on freehold land owned by TELUS. and opposition to, new radio towers. Public concerns include Intangible assets include wireless spectrum licensed from Industry Canada, perceived health risks essential to providing wireless services. . Increasing stakeholder interest in environmental issues.

Real properties (owned or leased) include: administrative office space, work Risks associated with legal and regulatory compliance, defects centres and space for telecommunications equipment. A small number of in software and failures in data and transaction processing, buildings are constructed on leasehold land and the majority of radio towers and intellectual property and proprietary rights – See Section 10.9 are situated on lands held under leases or licences for varying terms. Litigation and legal matters.

TELUS International provides contact centre and business process and IT Human-caused and natural threats to TELUS infrastructure outsourcing by utilizing sophisticated on-site facilities including call centre and operations – See Section 10.10. solutions, and by utilizing international data networks and reliable data centres with rigorous privacy and security standards. Global rerouting and diversity is provided through facilities in North America, Latin America and Asia-Pacific.

4.3 Liquidity and capital resources Common Shares and Non-Voting Shares, issue new shares from treasury, purchase shares for cancellation pursuant to permitted normal course Capital structure financial policies issuer bids, issue new debt, issue new debt to replace existing debt The Company’s objectives when managing capital are: (i) to maintain with different characteristics and/or increase or decrease the amount of a flexible capital structure that optimizes the cost and availability of sales of trade accounts receivable to an arm’s-length securitization trust. capital at acceptable risk; and (ii) to manage capital in a manner that The Company monitors capital utilizing a number of measures, considers the interests of equity and debt holders. including net debt to EBITDA – excluding restructuring costs and divi- In the management and definition of capital, the Company includes dend payout ratios. On May 4, 2010, the Board of Directors approved Common Share and Non-Voting Share equity (excluding accumulated a revised dividend payout ratio guideline of 55 to 65% of sustainable other comprehensive income), long-term debt (including any associated net earnings on a prospective basis. See Section 7.4 Liquidity and capital hedging assets or liabilities, net of amounts recognized in accumulated resource measures. other comprehensive income), cash and temporary investments and securitized accounts receivable. Financing and capital structure management plans The Company manages the capital structure and makes adjustments Progress against the 2010 plan is described below, followed by plans to it in light of changes in economic conditions and the risk characteristics for 2011. of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to holders of

Reporting back on TELUS’ 2010 financing and capital structure management plan Pay dividends to the holders of TELUS Common Shares and Non-Voting Shares The quarterly dividend paid on January 4, 2011, was 52.5 cents per share, a 10.5% increase from the 47.5 cents per share dividend paid on January 4, 2010. The Company announced two 2.5-cent increases during 2010. Use proceeds from securitized receivables, bank facilities, commercial paper and dividend reinvestment, as needed, to supplement free cash flow and meet other cash requirements Stronger free cash flow, as well as reduced cash outflow for dividends reinvested in TELUS Non-Voting Shares issued from treasury, facilitated a $443 million reduction in net debt during 2010. Maintain compliance with financial objectives, policies and guidelines Generally maintain a minimum $1 billion in unutilized liquidity – The Company had unutilized liquidity of more than $1.9 billion at December 31, 2010, including more than $1.8 billion of unutilized credit facilities and $100 million availability under the accounts receivable securitization program.

Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0 times – Actual result of 1.8 times at December 31, 2010.

Dividend payout ratio guideline of 55 to 65% of sustainable net earnings on a prospective basis – See Section 7.4.

TELUS 2010 annual report . 53 Reporting back on TELUS’ 2010 financing and capital structure management plan Maintain position of fully hedging foreign exchange exposure for indebtedness Maintained for the 8% U.S. dollar Notes due June 2011, the only foreign currency-denominated debt issue. The Company unwound the portion of its cross currency interest rate swaps associated with the early partial redemption of 45% of these Notes outstanding at September 2, 2010 (see Section 7.3 Cash used by financing activities). Preserve access to the capital markets at a reasonable cost by maintaining investment grade credit ratings in the range of BBB+ to A–, or the equivalent, in the future At February 24, 2011, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range with a stable trend or outlook.

TELUS’ 2011 financing and capital structure from the open market with no discount. Non-Voting Shares acquired management plan with optional cash payments at 100% of the average price under At December 31, 2010, TELUS had access to undrawn credit facilities the DRISP program will also change from treasury issuance to market of more than $1.8 billion and availability of $100 million under its accounts purchase, which will come into effect on March 1, 2011. The change receivable securitization program. At December 31, 2010, the Company will result in increased cash outlays in respect of dividend payments. had access to a shelf prospectus pursuant to which it can issue up While anticipated cash flow is expected to be more than sufficient to $2 billion of debt and equity. TELUS believes that its investment grade to meet current requirements and remain in compliance with TELUS’ credit ratings provide reasonable access to capital markets to facilitate financial policies, these intentions could constrain TELUS’ ability to invest future debt issuance. in its operations for future growth. As described in Section 1.5, payment The Company’s long-term debt principal maturities are illustrated of net cash income taxes and funding of defined benefit pension plans in the adjacent chart, including maturity of its 8% U.S. dollar Notes in will reduce the after-tax cash flow otherwise available to return capital to June 2011. TELUS expects to maintain its current position of fully hedging the Company’s shareholders. If actual results are different from TELUS’ its foreign exchange exposure for indebtedness on the U.S. dollar debt. expectations, there can be no assurance that TELUS will not need to TELUS may issue additional long-term debt to refinance the 8% U.S. dol- change its financing plans, or its intention to pay dividends according lar Notes, although the Company has sufficient unutilized credit facilities to the target payout guideline. For the related risk discussion, see to refinance this debt without accessing the long-term debt markets. Section 10.6 Financing and debt requirements. At the end of 2010, 93% of TELUS’ total debt was on a fixed-rate basis and the weighted average term to maturity was approximately 4.4 Disclosure controls and procedures 5.7 years, up from 5.0 years at the end of 2009. and internal control over financial reporting

LONG-TERM DEBT PRINCIPAL MATURITIES Disclosure controls and procedures AS AT DECEMBER 31, 2010 ($ millions) Disclosure controls and procedures are designed to provide reasonable

2025 200 assurance that all relevant information is gathered and reported to senior 2024 management, including the President and Chief Executive Officer (CEO) 2023 and the Executive Vice-President and Chief Financial Officer (CFO), 2022 249 on a timely basis so that appropriate decisions can be made regarding 2021 175 public disclosure. 2020 1,000 The CEO and the CFO have evaluated the effectiveness of the 2019 1,000 Company’s disclosure controls and procedures related to the preparation 2018 of the MD&A and the Consolidated financial statements. They have 2017 700 concluded that the Company’s disclosure controls and procedures were 2016 effective, at a reasonable assurance level, to ensure that material infor- 2015 625 mation relating to the Company and its consolidated subsidiaries would 2014 700 be made known to them by others within those entities, particularly 2013 300 2012 404 during the period in which the MD&A and the Consolidated financial 2011 1,142 statements contained in this report were being prepared.

Maturities in 2011 include the derivative liability associated with U.S. dollar Notes, at exchange rates in effect on December 31, 2010. Internal control over financial reporting Internal control over financial reporting is designed to provide reasonable TELUS expects to generate free cash flow in 2011, which would assurance regarding the reliability of financial reporting and the prepara- be available to, among other things, pay dividends to holders of Common tion of financial statements in accordance with Canadian GAAP and the Shares and Non-Voting Shares. Effective March 1, 2011, TELUS will requirements of the Securities and Exchange Commission in the United change its current practice of issuing shares from treasury at a 3% States, as applicable. TELUS’ CEO and CFO have assessed the effective- discount for reinvested dividends under the dividend reinvestment and ness of the Company’s internal control over financial reporting as at share purchase (DRISP) program and switch back to purchasing shares December 31, 2010, in accordance with Internal Control – Integrated

54 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 5

Framework, issued by the Committee of Sponsoring Organizations Deloitte & Touche LLP, the Company’s auditor, has audited of the Treadway Commission (COSO). Based on this assessment, internal controls over financial reporting of TELUS Corporation as TELUS’ CEO and CFO have determined that the Company’s internal at December 31, 2010. control over financial reporting is effective as at December 31, 2010, and expect to certify TELUS’ annual filings with the U.S. Securities Changes in internal control over financial reporting and Exchange Commission on Form 40-F, as required by the There were no changes in internal control over financial reporting that United States Sarbanes-Oxley Act, and with Canadian securities have materially affected, or are reasonably likely to materially affect, regulatory authorities. the Company’s internal control over financial reporting.

DISCUSSION OF OPERATIONS 5 A detailed discussion of operating performance for 2010

The discussion in this section is qualified in its entirety by the Caution As at December 31 regarding forward-looking statements at the beginning of the MD&A. ($ millions) 2010 2009 2008 Total assets 19,599 19,219 19,021 5.1 Selected annual information Current portion of long-term debt 743 82 4 The selected three-year consolidated financial information presented Current portion of derivative liabilities 419 62 75 as currently reported according to Canadian GAAP has been derived Non-current financial liabilities from, and should be read in conjunction with, the Consolidated financial Long-term debt 5,313 6,090 6,348 statements of TELUS for the year ended December 31, 2010, and its Derivative and other non-current annual Consolidated financial statements for previous years. For infor- financial liabilities 397 1,108 1,103 mation on the Company’s changeover to IFRS on January 1, 2011, 5,710 7,198 7,451 and the transition effects on 2010, see Section 8.2. Future income taxes 1,498 1,319 1,213

Selected annual information Owners’ equity Common equity 8,179 7,554 7,085 Years ended December 31 Non-controlling interests 22 21 23 ($ in millions, except per share amounts) 2010 2009 2008

Operating revenues 9,779 9,606 9,653 Differences among the three Net income 1,038 1,002 1,131 years presented: 2010 REVENUE MIX – 74% WIRELESS AND DATA Income per Common Share . Revenues increased by 1.8% in and Non-Voting Share 2010 after decreasing by 0.5% – basic 3.23 3.14 3.52 in 2009 and growing by 6% in 26% – diluted 3.22 3.14 3.51 40% 2008. Wireless revenue and Cash dividends declared wireline data revenue combined per Common Share represent approximately 74% of and Non-Voting Share 2.00 1.90 1.825 consolidated revenues in 2010, 23% as compared to 71% in 2009 11% and 69% in 2008. Legacy wire- wireless voice wireline voice line voice revenues continue to wireless data wireline data be eroded by competition and technological substitution. . Net income includes income tax-related adjustments resulting from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest. These adjustments positively affected Net income by approximately $30 million (nine cents per share) in 2010, $165 million (52 cents per share) in 2009 and $41 million (13 cents per share) in 2008. . The decrease in Non-current financial liabilities at December 31, 2010, is principally due to the remaining U.S. dollar Notes maturing June 1, 2011, and associated derivative liability becoming current liabilities, as well as debt reduction during 2010. (See Section 6.)

TELUS 2010 annual report . 55 5.2 Summary of quarterly results and fourth quarter recap

($ in millions, except per share amounts) 2010 Q4 2010 Q3 2010 Q2 2010 Q1 2009 Q4 2009 Q3 2009 Q2 2009 Q1

Operating revenues 2,551 2,455 2,398 2,375 2,443 2,411 2,377 2,375 Operations expense 1,672 1,501 1,460 1,429 1,577 1,456 1,451 1,441 Restructuring costs 32 17 19 6 77 32 53 28

EBITDA(1) 847 937 919 940 789 923 873 906 Depreciation 340 332 316 345 347 330 330 334 Amortization of intangible assets 103 100 91 108 94 100 94 93 Operating income 404 505 512 487 348 493 449 479 Other expense 11 7 6 8 10 6 11 5 Financing costs 102 182 114 112 230 101 106 95 Income before income taxes 291 316 392 367 108 386 332 379 Income taxes (recovery) 64 69 96 99 (48) 106 88 57 Net income 227 247 296 268 156 280 244 322 Net income attributable to Common Shares and Non-Voting Shares 226 246 295 267 155 279 243 321 Income per Common Share and Non-Voting Share – basic 0.70 0.77 0.92 0.84 0.49 0.88 0.77 1.01 – diluted 0.70 0.76 0.92 0.84 0.49 0.87 0.77 1.01 Cash dividends declared per Common Share and Non-Voting Share 0.525 0.50 0.50 0.475 0.475 0.475 0.475 0.475

(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA).

Trends The wireline revenue trend reflects data revenue growth resulting The consolidated revenue trend reflects: (i) year-over-year growth from the 85% increase in the TELUS TV subscriber base in 2010 in wireless network revenues generated from an increasing subscriber as well as growth in enhanced data, Internet and managed workplace base and increased equipment and other revenues; and (ii) growth revenues, moderated by ongoing declines in legacy basic data services. in wireline data revenues including TELUS TV, being more than offset The decline in wireline voice revenues is due to substitution to wireless by declining legacy wireline voice and other revenues. and Internet services, as well as competition from VoIP service providers Wireless network revenue increased by 8.8% year-over-year in the (including cable-TV competitors), resellers and facilities-based competi- fourth quarter of 2010 reflecting a general trend of growing data ARPU, tors. See risk discussion in Section 10.1 Competition. Residential network which continued in the quarter with a year-over-year growth of 27%, access line (NAL) net losses improved in the second half of 2010 when partly offset by declining voice ARPU of 5.2% (as discussed further in compared to the prior year and the first half of 2010, positively impacted Section 5.4). Data ARPU growth is due to increased adoption of data by improved service bundle offers. Residential NAL losses had increased plans driven by increased smartphone adoption. The growing demand year-over-year in the first half of 2010 as a result of promotional activity for wireless data may challenge network and spectrum capacity in the from a primary regional cable-TV competitor for local telephony and future (see Section 10.2 Technology). Wireless equipment and other Internet services, and ongoing wireless substitution. Business NAL losses revenues increased by 13% year-over-year in the fourth quarter of 2010, in 2010 reflect increased competition in the small and medium business primarily from higher acquisition and retention volumes that were market, conversion of voice lines to more efficient IP services, and cautious driven by a higher smartphone mix. business spending, as well as lower growth in Ontario and Quebec due The entry of new wireless competitors, as well as the launch of a to the completion of some large enterprise deals, which also included new wireless incumbent flanker brand and a competitor brand re-launch, large private IP networks that are not counted as access lines. could disrupt usual seasonal patterns for wireless subscriber additions The trend in operations expense reflects higher wireless subscriber in the future. Historically, there has been significant fourth quarter sea- acquisition and retention costs, expenses from Black’s Photo since sonality with respect to higher wireless subscriber additions, related September 2009, and increased TELUS TV costs from the near-doubling acquisition costs and equipment sales, and higher retention costs due of the subscriber base, net of efficiencies realized from restructuring to contract renewals, resulting in lower fourth quarter wireless EBITDA. initiatives. The third quarter has become more significant in terms of subscriber Quarterly restructuring costs in 2010 were lower than reported in additions and associated acquisition costs in recent years as a result 2009 as management accelerated efficiency initiatives, primarily in the of back-to-school offers, while subscriber additions have typically wireline segment in that year. been lowest in the first quarter. In addition, wireless ARPU has generally The sequential decrease in quarterly depreciation expense in the risen sequentially in the second and third quarters, and declined second quarter of 2010 included an adjustment for an increase in the sequentially in the fourth and first quarters. estimated useful life of TV set-top boxes (see Section 5.3 Consolidated operations – Depreciation). The sequential increase in depreciation

56 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 5

expense in the fourth quarter of 2009 resulted from growth in capital include a $52 million loss on early redemption of approximately 45% assets in service, including the wireless HSPA+ network launched of the principal amount of 8% U.S. dollar Notes (maturity June 2011) in November 2009. and unwinding of related cross currency interest rate swaps. Similarly, The increase in Amortization of intangible assets in 2010 resulted financing costs in the fourth quarter of 2009 include a $99 million from implementation of HSPA+ services in November 2009. Offsetting loss for a similar early partial redemption of these Notes. Each partial this in the second quarter of 2010 was a reduction of approximately redemption was financed with a new 10-year, $1 billion 5.05% Note $5 million for investment tax credits (ITCs) following determination issue (see discussion in Section 7.3). of eligibility by taxation authorities, for assets capitalized in prior years The trends in Net income and earnings per share (EPS) reflect the that are now fully amortized. Similarly, ITCs reduced amortization items noted above, as well as adjustments arising from legislated income by approximately $10 million in the fourth quarter of 2009. tax changes, settlements and tax reassessments for prior years, includ- Financing costs for each period shown are also net of varying amounts ing any related interest on reassessments. The information presented of interest income, including interest from the settlement of prior years’ below for 2009 has been revised from that reported in fiscal 2009, and income tax-related matters. Financing costs in the third quarter of 2010 now excludes investment tax credits.

Income tax-related adjustments

($ in millions, except EPS amounts) 2010 Q4 2010 Q3 2010 Q2 2010 Q1 2009 Q4 2009 Q3 2009 Q2 2009 Q1

Approximate Net income impact 10 9 10 1 71 14 18 62 Approximate EPS impact 0.03 0.03 0.03 – 0.23 0.04 0.06 0.19 Approximate basic EPS excluding income tax-related impacts 0.67 0.74 0.89 0.84 0.26 0.84 0.71 0.82

Fourth quarter offset by changes in other income tax items. Excluding favourable Management’s review of operations contained in TELUS’ fourth quarter income tax-related adjustments, charges for the early partial redemption news release on February 11, 2011, discussed fourth quarter results in of U.S. dollar Notes and termination of related cross currency interest detail. The following summarizes fourth quarter operating results in 2010, rate swaps, underlying Net income increased by $63 million in the fourth as compared to 2009. quarter when compared to the same period in 2009, as shown below. Consolidated Operating revenues increased by $108 million in the fourth quarter of 2010 when compared to the same period in 2009. Analysis of Net income

Wireless network revenue increased year-over-year by $97 million due Quarters ended December 31 to growth in data revenue driven by increasing smartphone adoption, ($ millions) 2010 2009 Change partly offset by declining voice ARPU. Wireless equipment and other Net income 227 156 71 revenue increased year-over-year by $16 million due to increased acqui- Add back after-tax loss sition and retention volumes, and sales of accessories. Wireline segment on redemption of debt – 69 (69) data revenue increased year-over-year by $37 million due to growth Deduct net favourable income in TELUS TV, enhanced data and Internet services and managed work- tax-related adjustments, place revenues. However, wireline data revenue growth was more than including related interest income (10) (71) 61 offset by year-over-year declines in legacy voice and other revenues Net income before above items totalling $42 million. (approximate) 217 154 63 Operating income increased by $56 million in the fourth quarter of 2010 when compared to the same period in 2009, mainly due to a Cash provided by operating activities increased by $72 million in $58 million increase in EBITDA, slightly offset by increased amortiza- the fourth quarter of 2010 when compared to the same period in 2009. tion expenses. Wireless EBITDA increased by $41 million while wireline The increase reflects higher income tax recoveries and lower interest EBITDA increased by $17 million. payments, partly offset by a comparative reduction in cash flow received Income before income taxes increased by $183 million in the from securitized accounts receivable. fourth quarter of 2010 when compared to the same period in 2009. Cash used by investing activities increased by $46 million in the The increase resulted primarily from higher Operating income and fourth quarter of 2010 when compared to the same period in 2009, lower net financing costs, including lower charges associated with the reflecting increased capital expenditures for efficiency initiatives. early partial redemption of long-term debt. Cash used by financing activities increased by $66 million in the Net income increased by $71 million in the fourth quarter of 2010 fourth quarter of 2010 when compared to the same period in 2009, when compared to the same period in 2009. Higher income before principally due to refinancing activities and debt reduction since income taxes and lower blended statutory income tax rates were partly December 2009.

TELUS 2010 annual report . 57 5.3 Consolidated operations and operating results, as well as inclusion of a full year of expenses

Years ended December 31 from Black’s Photo, acquired in September 2009. Defined benefit ($ millions, except pension plan expenses, principally in the wireline segment, were EBITDA margin and employees) 2010 2009 Change $28 million in 2010, up by $10 million from 2009. Operating revenues 9,779 9,606 1.8% . Other operations expenses increased by $219 million. The increase Operations expense 6,062 5,925 2.3% was mainly due to higher wireless subscriber acquisition and retention Restructuring costs 74 190 (61.1)% costs, higher TELUS TV costs related to the 85% increase in the EBITDA(1) 3,643 3,491 4.4% subscriber base over 12 months, and inclusion of a full year of Black’s Depreciation 1,333 1,341 (0.6)% Photo expenses. These increases were partly offset by lower wireline Amortization of intangible assets 402 381 5.5% expenses as a result of efficiency initiatives, supplier credits and Operating income 1,908 1,769 7.9% one-time operating savings.

EBITDA margin (%)(2) 37.3 36.3 1.0 pt. Full-time equivalent (FTE) employees 33,900 35,300 (4.0)% Restructuring costs Restructuring costs decreased by $116 million in 2010 when compared pt(s) – percentage point(s). to 2009, reflecting a relatively high level of restructuring activities in the (1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, wireline segment in the prior year period. Restructuring costs in 2010 depreciation and amortization (EBITDA). (2) EBITDA divided by Operating revenues. were primarily severance costs and charges for vacating and subletting certain real estate space, in respect of efficiency initiatives described Discussion of TELUS’ consolidated operations follows. Segmented in Investing in internal capabilities in Section 2.2. A full-year expense of discussion is provided in Section 5.4 Wireless segment, Section 5.5 approximately $50 million is expected for efficiency initiatives in 2011 Wireline segment and Section 7.2 Cash used by investing activities – (see Key assumptions in Section 1.5). capital expenditures.

EBITDA Operating revenues EBITDA increased by $152 million in 2010 when compared to 2009. Consolidated Operating revenues increased by $173 million in 2010 The increase was primarily due to lower restructuring costs and traction when compared to 2009, as wireless growth continued to exceed wire- from efficiency initiatives, supplemented by a high margin application line revenue declines. Wireless network revenue increased year-over-year software sale and one-time operating savings in the first quarter of 2010. by $219 million due to growth in data revenue driven by increasing Wireless EBITDA increased by $98 million in 2010 when compared to smartphone adoption, partly offset by declining voice ARPU. Wireless 2009, while wireline EBITDA increased year-over-year by $54 million. equipment and other revenue increased year-over-year by $88 million due to increased acquisition and retention volumes, sales of accessories Depreciation; Amortization of intangible assets and inclusion of a full year’s results from Black’s Photo, acquired in Combined depreciation and amortization expenses increased by September 2009. Wireline segment data revenue increased year-over- $13 million in 2010 when compared to 2009. year by $122 million due to growth in TELUS TV, enhanced data and . Depreciation decreased by $8 million in 2010 when compared to Internet services and managed workplace revenues. However, wireline 2009. Growth in TELUS TV and broadband capital assets was largely data revenue growth was more than offset by year-over-year declines offset by lower depreciation due to asset life changes determined in in legacy voice and other revenues totalling $256 million. a continuing program of asset life studies (including an increase in the estimated useful life for TELUS TV set-top boxes in 2010), certain Operations expense computer hardware and digital cell sites becoming fully depreciated Operations expense increased by $137 million in 2010 when compared (while the majority remain in service) and lower retirements in 2010. to 2009. . Amortization of intangible assets increased $21 million in 2010 when Years ended December 31 compared to 2009. Growth in software assets, including application ($ millions) 2010 2009 Change software supporting wireless HSPA+ services, was partly offset by Salaries, benefits and lower amortization for other fully amortized software assets still in employee-related costs 2,311 2,393 (3.4)% use. Amortization was reduced by investment tax credits for assets Other operations expenses 3,751 3,532 6.2% capitalized in prior years that are now fully amortized (reductions 6,062 5,925 2.3% of approximately $5 million in 2010 and $10 million in 2009). . The Company completed its annual impairment testing for intangible In respect of changes in operations expense in 2010 when compared assets and goodwill in December 2010, and it was determined that to 2009: there were no impairments. See subtopics Intangible assets, net and . Salaries, benefits and employee-related costs decreased by $82 mil- Goodwill, net in Section 8.1 Critical accounting estimates. lion. The decrease was mainly due to lower wireline base salaries reflecting fewer domestic full-time equivalent (FTE) employees and Operating income a reduction of discretionary employee-related expenses, partially Operating income increased $139 million in 2010 when compared to offset by labour rate inflation in 2010 and increased employee per- 2009, as higher EBITDA and lower depreciation expenses were partially formance bonus compensation expenses due to improved financial offset by increased amortization expenses.

58 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 5

Other income statement items the redeemed Notes and $36 million for termination of the associated cross currency interest rate swaps. Other expense, net Interest income on tax refunds decreased by $44 million in 2010 Years ended December 31 when compared to 2009, as larger amounts were recognized in 2009 ($ millions) 2010 2009 Change for settlement of prior years’ tax matters. 32 32 – Income taxes Other expense, net, includes accounts receivable securitization expense, income (losses) or impairments in equity or portfolio investments, gains Years ended December 31 ($ millions, except tax rates) 2010 2009 Change and losses on disposal of real estate, and charitable donations. Accounts receivable securitization expenses were $8 million in 2010, Basic blended federal and provincial tax at statutory income tax rates 396 366 8.2% down $2 million from 2009 primarily due to lower rates. See Section 7.6 Revaluation of future income tax Accounts receivable sale for additional information. Charitable donations liability to reflect future statutory increased by $10 million in 2010, and were largely offset by net gains income tax rates (43) (99) – on the sale of minor investments and real estate in 2010 as compared Tax rate differential on, and to net losses on minor investments in 2009. consequential adjustments from, reassessments of prior years’ Financing costs tax issues (36) (68) – Share option award compensation 10 4 – Years ended December 31 ($ millions) 2010 2009 Change Other 1 – –

Interest on long-term debt, 328 203 61.6% short-term obligations and other 463 483 (4.1)% Blended federal and provincial Loss on redemption of long-term debt 52 99 (47.5)% statutory tax rates (%) 29.0 30.3 (1.3) pts. Interest income and foreign exchange (5) (50) – Effective tax rates (%) 24.0 16.8 7.2 pts. 510 532 (4.1)% Basic blended statutory income taxes increased by $30 million in 2010 Interest on long-term debt, short-term obligations and other decreased when compared to 2009, due to higher Income before income taxes, by $20 million in 2010 when compared to 2009 mainly due to lower partly offset by lower blended statutory income tax rates. The effective effective interest rates on long-term debt as well as a lower average debt tax rates were lower than the statutory tax rates due to revaluations of balance, partly offset by a $15 million financing charge in the third quarter future income tax liabilities and the tax rate differential and consequential of 2010 that arose from the CRTC’s determinations on the regulatory adjustments from reassessments of prior years’ tax issues. Changes to deferral account. B.C. income tax rates were enacted in the first quarter of 2009, reducing On September 2, 2010, the Company completed an early partial rates beginning January 1, 2010. Changes to Ontario income tax rates redemption of U.S.$607 million of publicly traded U.S. dollar 8% Notes from 2010 to 2013 were enacted in the fourth quarter of 2009 for provin- due June 1, 2011, and terminated associated cross currency interest rate cial income taxes effective July 1, 2010 and thereafter. In addition, swaps. The partial redemption was funded with $1 billion of new 5.05% enacted federal income tax rates decreased in 2010. 10-year Notes issued on July 23, 2010. The Company recorded a loss In 2010, the Rulings Division of Canada Revenue Agency (CRA) on redemption comprised of $36 million in respect of the redeemed advised the Company that, as a result of a detailed review of the Notes and $16 million for termination of the associated cross currency facts and regulatory issues concerning the acquisition of auctioned interest rate swaps. spectrum in 2001 and 2008, CRA agreed with the Company’s filed In December 2009, the Company completed an early partial tax position that the spectrum acquired in both circumstances repre- redemption of U.S.$577 million of publicly traded U.S. dollar 8% Notes sented an amortizable asset for income tax purposes, which would due June 1, 2011, and terminated associated cross currency interest be amortized on a straight-line basis over the 10-year life of the licences. rate swaps. The partial redemption was funded with $1 billion of new This is expected to result in lower cash income taxes in each year 5.05% 10-year Notes issued on December 1, 2009. The Company from 2011 to 2019, and does not include the impact of any future recorded a loss on redemption comprised of $63 million in respect of spectrum purchases. Share option award compensation in 2010 includes a $7 million write-off of a future income tax asset due to the enactment of new INTEREST EXPENSE ($ millions) legislation in December 2010 that changes the tax treatment of certain share-based compensation. Where stock option rights are acquired 10 463 52 515 by the Company in exchange for a cash payment, either the employee

1009 483 99 582 must forgo his or her personal income tax deduction, which emulates capital gains treatment, or the Company must forgo its tax deduction, 0908 481 thereby eliminating the double benefit afforded to employees and 08Interest expense before losses on long-term debt redemption corporations. To the extent that the Company acquires the stock option Losses on long-term debt redemption rights from employees, the Company has elected to forgo its tax 07 deduction for such payments. 06

TELUS 2010 annual report . 59 increased $10 million or 1.2%, as subscriber growth more than INCOME ($ millions) offset the moderating voice ARPU decline. Blended ARPU was $57.64 in 2010, a decrease of $0.82 or 1.4% 10 1,038 from 2009. Blended ARPU reflects increasing data usage driven by 10 1,366 growing smartphone adoption and increased roaming volumes, partly

09 1,002 offset by a decline in voice pricing (discussed further below), declining minutes used and increased penetration of mobile Internet keys and 1,205 0908 tablets. The trend in blended ARPU growth rates improved each quar- 0807 1,131 ter in 2010. Blended ARPU was $58.48 in the fourth quarter of 2010, an increase of $1.10 or 1.9% when compared to the same period in 0806 1,567 2009, and also reflected the usual fourth quarter decrease when com- Net income Income before income taxes pared to $58.75 in the third quarter of 2010. The 1.9% year-over-year growth in the quarter is a continued improvement from year-over-year declines of 1.2%, 1.9%, 4.4% and 7.7%, respectively, for the third, Other comprehensive income second and first quarters of 2010 and fourth quarter of 2009. Years ended December 31 Data ARPU was $14.39 in 2010, an increase of $2.51 or 21% ($ millions) 2009 Change 2010 from 2009. The increase in data ARPU was largely reflective of the data 54 58 (6.9)% revenue trend. Voice ARPU was $43.25 in 2010, a decrease of $3.33 or 7.1% from 2009. Voice ARPU in the fourth quarter of 2010 was Other comprehensive income includes changes in unrealized fair value $42.47, a decrease of $2.31 or 5.2% from the same period in 2009. of derivatives designated as cash flow hedges, principally associated The 5.2% year-over-year decline in fourth quarter voice ARPU has with U.S. dollar debt. In 2010, an approximate $11 million after-tax effect moderated from decreases of 6.7%, 7.2%, 9.5% and 12%, respec- of unwinding swaps associated with the early partial redemption of tively, experienced in the third, second and first quarters of 2010 U.S. dollar Notes in September 2010, or a pre-tax amount of $16 million, and fourth quarter of 2009. Voice ARPU decreases were caused by: was recognized in Financing costs. Similarly in 2009, an approximate declining voice minutes of use by both consumers and businesses; $25 million after-tax effect of unwinding swaps associated with the early increased use of included-minute rate plans as subscribers shift partial redemption of U.S. dollar Notes in December 2009, or a pre-tax usage patterns, substitute messaging for voice calls and move to amount of $36 million, was recognized in Financing costs. optimize price plans; increased penetration and lower service revenue of the Koodo brand; an increasing volume of mobile Internet key 5.4 Wireless segment and tablet subscriptions from which there is no voice revenue; elimi- Operating revenues – wireless segment nation of system access fees and carrier e911 charges on new rate plans; and lower Mike service ARPU; partly offset by increased Years ended December 31 ($ millions) 2010 2009 Change inbound roaming volumes and a fee implemented for customers electing to continue to receive a paper bill instead of an ebill. Network revenue 4,611 4,392 5.0% Gross and net subscriber additions reflect improved economic Equipment and other revenue 403 315 27.9% conditions, an enhanced handset line-up due in part to the availability External operating revenue 5,014 4,707 6.5% of the new HSPA+ network, promotional activity, a continued effort Intersegment revenue 33 28 17.9% to attract and retain high-value postpaid customers and expanded Total operating revenues 5,047 4,735 6.6% distribution through Black’s Photo since November 2009, partly offset by increased competitive intensity within both the postpaid Wireless segment revenue increased by $312 million in 2010 when and prepaid market segments. Total gross subscriber additions compared to 2009. increased by 6.9% in 2010, with postpaid gross additions increasing . Network revenue increased by $219 million in 2010 when compared by 12%. Postpaid gross additions were 68% of the total in 2010 to 2009. The increase was due to continued wireless data revenue (65% in 2009). Prepaid gross additions were stronger in the second growth and the 6.9% year-over-year growth in the subscriber base, half of 2010 mainly due to more competitive offers including data- partly offset by lower voice revenues. Data revenue increased by capable handset selection. $260 million or 30% in 2010, reflecting strength in smartphone service While gross subscriber additions in the fourth quarter of 2010 revenues and text messaging driven by increased penetration of increased by 9,000 over strong gross additions in the third quarter smartphones, increased adoption of data plans, higher-speed smart- of 2010, net subscriber additions in the fourth quarter of 2010 phones as well as mobile Internet key and tablet growth, and higher decreased by 34,000 from strong net additions in the third quarter inbound data roaming volumes, partly offset by lower roaming rates. of 2010. The sequential decrease in net additions was due to higher Data revenue represented 25% of network revenue in 2010, as churn rates resulting from increased competitive intensity in the compared to 20% in 2009. The decline in voice revenue slowed prepaid and postpaid markets and due to a larger number of post- to $41 million or 1.2% in 2010 primarily due to falling voice ARPU, paid contracts coming up for renewal. described further below. Notably, fourth quarter voice revenue

60 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 5

Overall, 2010 net additions increased by 10% when compared Wireless operating indicators to 2009, while maintaining a strong postpaid mix. Postpaid net As at December 31 2010 2009 Change additions were 93% of the total in both 2010 and 2009. Postpaid Subscribers (000s) subscriber net additions increased in 2010 when compared to Postpaid 5,705 5,290 7.8% 2009, as growth in postpaid gross additions was partly offset by Prepaid 1,266 1,234 2.6% slightly higher churn. Tot a l 6,971 6,524 6.9% The Company experienced a significant increase in smartphone adoption rates in the fourth quarter of 2010, with smartphones Proportion of subscriber base representing 46% of postpaid gross additions, as compared to 38% that is postpaid (%) 81.8 81.1 0.7 pts. (1) (2) in the third quarter of 2010 and 25% in the fourth quarter of 2009. Digital POP coverage (millions) 33.8 33.1 2.1% HSPA+ POP coverage (millions)(2) 33.1 31 ~ 6.7% At December 31, 2010, smartphone subscribers represented 33% of the postpaid subscriber base, as compared to 20% one year earlier. Smartphone subscribers generate significantly higher ARPU than Years ended December 31 2010 2009 Change those with messaging and voice-only devices, but have higher COA Subscriber gross additions (000s) and cost of retention resulting from the large device subsidies for Postpaid 1,160 1,036 12.0% multiple-year contract sales or renewals. A higher smartphone mix is Prepaid 550 563 (2.3)% expected to continue to positively impact future data revenue growth, Tot a l 1,710 1,599 6.9% ARPU and churn rates, which increase expected lifetime revenue, Subscriber net additions (000s) while increasing network usage and future costs of retention compared Postpaid 415 379 9.5% to historical levels. Prepaid 32 27 18.5% . The blended churn rates were 1.72% and 1.57%, respectively, Tot a l 447 406 10.1% in the fourth quarter and full year of 2010, as compared to 1.60% (3) and 1.58%, respectively, in the same periods in 2009. The increase ARPU ($) 57.64 58.46 (1.4)% Churn, per month(3) (%) 1.57 1.58 (0.01) pts. in the fourth quarter churn rate reflects increased prepaid and Average monthly minutes of non-smartphone postpaid churn from higher competitive marketing use per subscriber (MOU) 361 392 (7.9)% intensity due in part to price competition and an increased number of COA(4) per gross unlimited-usage rate plan offers entailing higher handset subsidies subscriber addition(3) ($) 350 337 3.9% from both new entrants and incumbent national competitors. The Retention spend to churn rate for the full year was comparable to 2009, reflecting these network revenue(3) (%) 11.6 10.9 0.7 pts. factors, offset by the availability of the new HSPA+ network for EBITDA to network revenue (%) 44.0 44.0 – the full year, greater choice in handsets including the Apple iPhone, (1) POP is an abbreviation for population. A POP refers to one person living in and successful retention efforts. a population area that is wholly or substantially included in the coverage area. . Equipment and other service revenue increased $88 million in 2010 (2) Including roaming/resale and network-sharing agreements, principally with Bell Canada. when compared to 2009. The increase was largely due to higher (3) See Section 11.3 Definitions of key wireless operating indicators. These are industry acquisition and retention volumes, greater smartphone loading, and measures useful in assessing operating performance of a wireless company, but are not measures defined under Canadian or U.S. GAAP. to a lesser extent, increased accessories revenues, as well as inclusion (4) Cost of acquisition. of full-year results from Black’s Photo, acquired in September 2009. The increase was partly offset by competitive pressure on handset Operating expenses – wireless segment prices, which drove higher handset subsidies in the second half Years ended December 31 of 2010. Average handset prices trended upward in 2010 due to the ($ millions) 2010 2009 Change increasing proportion of smartphones loaded, however, due to com- Equipment sales expenses 1,015 845 20.1% petitive pressures driving deeper subsidies, handset prices in the Network operating expenses 640 621 3.1% third quarter of 2010 were negatively impacted by higher subsidies Marketing expenses 440 422 4.3% when compared to the third quarter of 2009, and average handset General and administration prices in the fourth quarter of 2010 were flat compared to the (G&A) expenses same period in 2009. Salaries, benefits and . Intersegment revenue represents services provided by the wireless employee-related costs 596 581 2.6% segment to the wireline segment and is eliminated upon consolidation Other G&A expenses 321 321 – along with the associated expense in the wireline segment. Operations expense 3,012 2,790 8.0% Restructuring costs 4 12 (66.7)% Total operating expenses 3,016 2,802 7.6%

TELUS 2010 annual report . 61 Wireless segment total operating expenses increased by $214 million EBITDA – wireless segment in 2010 when compared to 2009. Years ended December 31 2010 2009 Change . Equipment sales expenses increased by $170 million in 2010 when EBITDA ($ millions) 2,031 1,933 5.1% compared to 2009. The increase was primarily due to higher acquisi- EBITDA margin (%) 40.2 40.8 (0.6) pts. tion and retention volumes, as well as higher per-unit costs to support increased smartphone loading for both new client acquisitions and Wireless segment EBITDA increased by $98 million in 2010 when the migration of existing clients, notably including a higher proportion compared to 2009. This reflects improvement in terms of data revenue of upgrades to Apple iPhones and RIM BlackBerrys. In 2010, this growth, postpaid subscriber growth, lower voice ARPU erosion and category also includes full-year results from Black’s Photo, acquired lower bad debt expenses. Wireless margins were pressured in 2010 pri- in September 2009. marily due to higher combined acquisition and retention costs associated . Network operating expenses increased by $19 million or 3.1% in 2010 with higher volumes and continued smartphone adoption following the when compared to 2009, which reflects increasing network efficiency launch in late 2009 of the new HSPA+ network and related devices such as indicated by network revenue growth of 5.0%. The increase in as the iPhone, earlier availability of the latest BlackBerry devices, and network expense reflects growth in roaming volumes, slightly higher increased competitive intensity driving higher handset subsidies. revenue-share and licensing costs, and the introduction of regulated e911 fees for wireless subscribers in Quebec, partly offset by lower 5.5 Wireline segment roaming costs from reduced rates. Lower negotiated revenue-share and licensing rates were more than offset by increases in revenue- Operating revenues – wireline segment share volumes to third parties and licensing volumes to service Years ended December 31 providers as a result of the continued penetration of smartphones. ($ millions) 2010 2009 Change . Marketing expenses increased by $18 million in 2010 when compared Data 2,268 2,146 5.7% to 2009, principally due to higher commissions related to higher Voice local 1,684 1,856 (9.3)% volumes, partly offset by lower advertising expenses in 2010 due Voice long distance 530 619 (14.4)% to the initial launch of the HSPA+ network in November 2009. Other 283 278 1.8% COA per gross subscriber addition increased by $13 or 3.9% in External operating revenue 4,765 4,899 (2.7)% 2010, when compared to 2009, due to higher per-unit subsidy costs Intersegment revenue 155 134 15.7% driven by a higher smartphone mix, and to a lesser extent higher Total operating revenue 4,920 5,033 (2.2)% commissions to support an increasing number of higher-value smart- phone devices. This was partly offset by a favourable U.S. dollar Total wireline segment revenue decreased $113 million in 2010 when exchange rate compared to 2009, higher advertising and promotion compared to 2009. expenditures in the fourth quarter of 2009 to support the HSPA+ . Wireline data revenues increased by $122 million in 2010 when network launch, and increased gross additions in 2010 creating compared to 2009. The increase resulted from: (i) strong subscriber improved efficiency of advertising and promotion expenditures per growth in TELUS TV services; (ii) increased Internet, enhanced gross addition. data and hosting services; (iii) higher managed workplace revenues Retention costs as a percentage of network revenue increased including a high margin software application sale in the first quarter to 11.6% in 2010, as compared to 10.9% in 2009. The retention of 2010; and to a lesser extent, (iv) increased data equipment cost ratio increased due to higher retention volumes related to sales. These increases were partly offset by declining legacy basic a larger subscriber base and a significantly larger volume of clients data services. migrating to smartphones, typically upgrades to HSPA devices, partly offset by improving network revenue growth, lower commissions Wireline operating indicators per retention subscriber and a favourable U.S. dollar exchange As at December 31 rate compared to 2009. (000s) 2010 2009 Change

. Total G&A expenses increased by only $15 million, or 1.7%, in 2010 Internet subscribers when compared to 2009, reflecting improved efficiency in supporting High-speed 1,167 1,128 3.5% the subscriber base, which grew by 6.9%. Dial-up 62 87 (28.7)% Salaries, benefits and employee-related costs increased by Tot a l 1,229 1,215 1.2% $15 million year-over-year, as higher 2010 performance bonus accruals TELUS TV subscribers(1) 314 170 84.7% due to improved financial and operating results and inclusion of

a full year of Black’s Photo expenses in 2010 were partly offset by Years ended December 31 reductions in domestic FTE employees. Other G&A expenses were (000s) 2010 2009 Change unchanged year-over-year, as inclusion of a full year of expenses Internet subscriber from Black’s Photo and increased external labour costs to support net additions (losses) the growing subscriber base were offset by lower bad debt expenses High-speed 39 37 5.4% and supplemented by one-time operating savings in the first quarter Dial-up (25) (37) 32.4%

of 2010. Bad debt expense decreased by $25 million, reflecting lower Tot a l 14 – n/m involuntary subscriber churn from an improved economy. TELUS TV subscriber . Restructuring costs decreased by $8 million in 2010 when compared net additions(1) 144 92 56.5% to 2009. See discussion in Section 5.3. n/m – not meaningful. (1) Includes Optik TV and TELUS Satellite TV subscribers.

62 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 5

The Company launched its new Optik TV and Optik High Speed . Voice long distance revenue decreased by $89 million in 2010 when Internet service brands in June 2010, as described in Section 2. This compared to 2009. The decrease reflects ongoing industry-wide launch, combined with enhanced bundling capabilities and retention price competition, losses of local subscribers, and technological offers, positively impacted TV and high-speed subscriber additions substitution to wireless and Internet-based services. in the second half of 2010 relative to the second half of 2009 and . Other revenue increased by $5 million in 2010 when compared to the first half of 2010. In addition, offers by the primary cable-TV com- 2009. The increase included $8 million of revenue recognized from petitor in Western Canada were scaled back in the second half of CRTC Telecom Decision 2010-900 Review of the large incumbent 2010. TELUS upgraded a significant portion of its IP TV subscribers local exchange carriers’ support structure service rates partly offset to Microsoft Mediaroom technology in 2010, with a plan to fully by lower voice equipment sales. migrate the rest of the subscriber base in 2011. . Intersegment revenue represents services provided by the wireline . Voice local revenue decreased by $172 million in 2010 when segment to the wireless segment and is eliminated upon consolidation compared to 2009. The decrease continues to reflect lower basic together with the associated expense in the wireless segment. access and enhanced voice service revenues caused by com- petition for residential subscribers, the consequent decline in local Operating expenses – wireline segment

residential access lines and matching of competitive offers, and Years ended December 31 technological substitution by wireless and Internet-based services. ($ millions) 2010 2009 Change The decrease also reflects a decline in business voice lines Salaries, benefits and from technological substitution to data services, competitor activity employee-related costs 1,715 1,811 (5.3)% including price competition, and cautious business spending. Other operations expenses 1,523 1,486 2.5% Operations expenses 3,238 3,297 (1.8)% Wireline operating indicators Restructuring costs 70 178 (60.7)% As at December 31 Total operating expenses 3,308 3,475 (4.8)% (000s) 2010 2009 Change

Network access lines (NALs)(1) Total wireline operating expenses decreased by $167 million in 2010 Residential 2,046 2,223 (8.0)% when compared to 2009. Business 1,693 1,743 (2.9)% . Salaries, benefits and employee-related expenses decreased by Tot a l 3,739 3,966 (5.7)% $96 million in 2010 when compared to 2009. The decrease primarily reflects lower base salaries from fewer domestic FTE employees Years ended December 31 and continued reduction of discretionary employee-related expenses (000s) 2010 2009 Change such as travel, partly offset by labour rate inflation in 2010, increased Net (losses) additions in NALs employee performance bonus compensation expenses due to Residential (177) (175) (1.1)% improved financial and operating results, and increased defined Business (50) (35) (42.9)% benefit plan expenses. Tot a l (210) (8.1)% (227) . Other operations expenses increased by $37 million in 2010 (1) As a result of a periodic subscriber measurement review and correction during when compared to 2009. The increase reflects higher TELUS TV the first quarter of 2010, historical NALs were restated for the prior periods programming and material costs related to the 85% increase in commencing in 2007. Total NALs at December 31, 2009, reflect a reduction of 15,000 residential NALs from the figure reported in the 2009 MD&A, in the subscriber base, and higher advertising and promotions costs, respect of TELUS TV subscribers who did not subscribe to voice lines, but partly offset by lower transit and termination costs due to lower were inadvertently included in NAL counts. Business NALs were reduced by 67,000 from the figure reported in the 2009 MD&A due to the cleanup and rates, supplier credits, lower cost of goods sold related to lower removal of inaccurate subscriber records as part of the integration of billing overall equipment sales, and one-time operating savings in the and subscriber reporting processes, as well as the consistent application first quarter of 2010. of industry measurement practices across TELUS. . Restructuring costs decreased by $108 million in 2010 when Residential NALs continue to be affected by wireless and Internet- compared to 2009. See discussion in Section 5.3. based technological substitution for local services, as well as promotional activity by primary cable-TV competitors in the Company’s EBITDA – wireline segment incumbent areas of B.C., Alberta and Eastern Quebec. Residential Years ended December 31 2010 2009 Change NAL losses improved in the second half of 2010 relative to the loss experience in the second half of 2009 and the first half of 2010 due EBITDA ($ millions) 1,612 1,558 3.5% EBITDA margin (%) 32.8 31.0 1.8 pts. to the Company’s enhanced bundling capabilities resulting from its expanded TV offering with Optik TV and the provision of competitive Wireline segment EBITDA increased by $54 million in 2010 when retention offers. compared to 2009. Improvement in the EBITDA margin resulted from Business NAL losses in 2010 reflect increased competition in lower restructuring costs and operating savings realized from efficiency the small and medium business market, conversion of voice lines to initiatives to mitigate declining voice revenues, supplemented by a high more efficient IP services, cautious business spending, and slower margin software application sale in the first quarter of 2010, partially offset growth in data lines due to the completion of some large enterprise by increased costs associated with the growth in TELUS TV services. deals that also included large private IP networks. Growth in certain data services such as private IP networks is not measured by business NAL counts, and conversion of legacy voice services to IP services results in an overall decrease in business NALs.

TELUS 2010 annual report . 63 CHANGES IN FINANCIAL POSITION A discussion of changes in the Consolidated statements of financial position 6 for the year ended December 31, 2010

Changes in the Consolidated statements of financial position for the year ended December 31, 2010, are as follows:

Financial position as at December 31 Change Change ($ millions) 2010 2009 ($ millions) (%) Explanation of the change

Current assets Cash and temporary investments, net 17 41 (24) (59) See Section 7: Liquidity and capital resources Accounts receivable 917 694 223 32 The increase includes a $100 million reduction in proceeds from securitized accounts receivable (see Section 7.6), as well as increased receivables due to the growing wireless postpaid subscriber base and increase in postpaid ARPU

Income and other taxes receivable 56 16 40 n/m Reflects an increase in accrued recoveries for income and other taxes receivable, net of refunds received

Inventories 283 270 13 5 Mainly an increase in wireless dealer inventories Prepaid expenses 113 105 8 8 Mainly an increase in prepaid maintenance contracts net of amortization

Derivative assets 4 1 3 n/m – Current liabilities Accounts payable and accrued liabilities 1,495 1,385 110 8 Reflects an increase in fourth quarter capital and operating expenditures payable, and increased semi-annual interest payable

Income and other taxes payable 6 182 (176) (97) Primarily reflects final income tax payments in the first quarter of 2010 for the 2009 tax year and 2010 instalments substantially paid during the year

Restructuring accounts payable 111 135 (24) (18) Payments exceeded new obligations from and accrued liabilities restructuring initiatives

Dividends payable 169 150 19 13 Primarily reflects the 10.5% increase in the dividend rate for the fourth quarter 2010 dividend, as compared to the fourth quarter of 2009

Advance billings and customer deposits 658 674 (16) (2) Includes reclassification of $81 million of the price cap deferral account to Non-current liabilities, net of increased billings due to subscriber growth

Current maturities of long-term debt 743 82 661 n/m The balance at December 31, 2010, includes $736 million for 8% U.S. dollar Notes maturing in June 2011 after partial redemption of the Notes outstanding on September 2. Two smaller issues totalling $80 million that were current at December 31, 2009, matured and were repaid in 2010. See Section 7.3. The residual amounts are capital leases

Derivative liabilities 419 62 357 n/m The December 31, 2010, balance and net change from December 31, 2009, includes $404 million for derivative liabilities associated with the June 2011 maturity of U.S. dollar Notes after fair value adjustments and termination of the portion associated with the partial redemption of Notes on September 2. This was partly offset by fair value adjustments for share option and restricted share unit hedges, and unwinding option hedges

Current portion of future income taxes 348 294 54 18 Primarily due to changes in the accounting classification of related liabilities between current and long-term, reduction in reserves for income tax purposes and changes in partnership income that will be allocated over the next 12 months

64 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 6

Financial position as at December 31 Change Change ($ millions) 2010 2009 ($ millions) (%) Explanation of the change

Working capital(1) (2,559) (1,837) (722) (39) Primarily due to the remaining balance of U.S. dollar Notes maturing in June 2011 and associated derivative liabilities (see Section 7.3), partly offset by higher receivables and lower income taxes payable

Non-current assets Property, plant and equipment, net 7,722 7,729 (7) – See Capital expenditures in Section 7.2 Cash used by investing activities and Depreciation in Section 5.3 Consolidated operations

Intangible assets, net 5,134 5,148 (14) – See Capital expenditures in Section 7.2 Cash used by investing activities and Amortization in Section 5.3 Consolidated operations. Included in the balances for both periods are wireless spectrum licences of $3,849 million

Goodwill, net 3,572 3,572 – – – Other long-term assets 1,744 1,602 142 9 Primarily pension plan funding and amortization of transitional pension assets

Investments 37 41 (4) (10) Dispositions and write-downs of small investments were partially offset by new investments

Non-current liabilities Long-term debt 5,313 6,090 (777) (13) The decrease primarily reflects reclassification of U.S. dollar Notes maturing in June 2011 to Current liabilities, and a $363 million decrease in commercial paper, net of a $1 billion Note issue in July 2010

Other long-term liabilities 638 1,271 (633) (50) The decrease primarily reflects reclassification of the $721 million derivative liability associated with the U.S. dollar Notes maturing in June 2011 to Current liabilities, partly offset by reclassification of $81 million of the price cap deferral account from Current liabilities

Future income taxes 1,498 1,319 179 14 An increase in future taxes on long-term assets and liabilities partly offset by a reclassification to the Current portion of future income taxes

Owners’ equity Common Share and Non-Voting 8,179 7,554 625 8 Mainly Net income of $1,034 million and Other Share equity compre hensive income of $54 million, less declared dividends of $642 million, and adding back $150 million for treasury shares issued for dividends reinvested in Non-Voting Shares under the dividend re-investment plan

Non-controlling interests 22 21 1 5 Net income of $4 million attributable to non-controlling interests less dividends of $3 million paid by a subsidiary to a non-controlling interest

(1) Current assets subtracting Current liabilities.

TELUS 2010 annual report . 65 LIQUIDITY AND CAPITAL RESOURCES 7 A discussion of cash flow, liquidity, credit facilities and other disclosures

The discussion in this section is qualified by the Caution regarding . Interest received decreased by $51 million in 2010 when compared forward-looking statements at the beginning of the MD&A. to 2009, mainly due to higher receipts of interest on the settlement The Company’s capital structure financial policies, financing plan of tax-related matters in 2009. and results are described in Section 4.3. In the normal course, the . Income tax payments net of recoveries were $311 million in 2010 Company has generated annual cash flow from operations exceeding or higher net payments of $45 million, primarily due to the receipt of annual capital investment needed to support business growth and higher income tax recoveries in 2009 together with a slight increase re-invest in technology. In both 2010 and 2009, cash provided by in instalments in 2010. operating activities exceeded cash used by investing activities, long- . Other changes in non-cash working capital. term debt was reduced and the average term to maturity of debt was extended through financing activities. CASH PROVIDED BY OPERAT ING ACTIVITIES ($ millions)

Summary of Consolidated statements of cash flows 10 2,546

Years ended December 31 0910 2,904 ($ millions) 2010 2009 Change 0809 2,819 Cash provided by operating activities 2,546 2,904 (12.3)% Cash (used) by investing activities (1,707) (2,128) 19.8% 08 Cash (used) by financing activities (863) (739) (16.8)% 07 Increase (decrease) in cash and CAPITA L EXPENDITURES ($ millions) temporary investments, net (24) 37 – 06 10 1,721 Cash and temporary investments, net, beginning of period 41 4 – 0910 2,103

Cash and temporary investments, 0809 1,859 882 2,741 net, end of period 17 41 (58.5)% 08General capital expenditures AWS spectrum licences

7.1 Cash provided by operating activities 07

Cash provided by operating activities decreased by $358 million in 2010 7.206 Cash used by investing activities when compared to 2009. Year-over-year comparative changes in cash Cash used by investing activities decreased by $421 million in 2010 flow included: when compared to 2009, principally due to lower capital expenditures . Changes in proceeds from securitized accounts receivable and an acquisition in 2009. (included in Net change in non-cash working capital on the consoli- dated statements of cash flow) are a use of cash when proceeds Capital expenditures are reduced and a source of cash when proceeds are increased. Years ended December 31 Proceeds were reduced by $100 million in 2010, as compared to an ($ millions, except capital intensity) 2010 2009 Change

increase of $200 million in 2009, for a comparative decrease in cash Wireless segment 463 770 (39.9)% flow of $300 million. (See Section 7.6 Accounts receivable sale.) Wireline segment 1,258 1,333 (5.6)% . EBITDA – excluding restructuring costs increased by $36 million Total capital expenditures 1,721 2,103 (18.2)% in 2010 when compared to 2009. (1) . Employer contributions to defined benefit plans in excess of the EBITDA less capital expenditures 1,922 1,388 38.5% Capital intensity(2) (%) 18 22 (4) pts. defined benefit expense decreased by $51 million in 2010 when compared to 2009. The Company made a voluntary one-time pension (1) See Section 11.1 EBITDA for the calculation and description. contribution of $200 million in January 2011. (See Section 1.5.) (2) Capital intensity is calculated as capital expenditures divided by operating revenues. This measure provides a basis for comparing the level of capital expenditures to . Interest paid decreased by $96 million in 2010 when compared to other companies of varying size within the same industry. 2009. The decrease resulted from lower losses on early redemption Total capital expenditures decreased by $382 million in 2010 when of U.S. dollar Notes ($52 million in September 2010 as compared compared to 2009. EBITDA less capital expenditures increased by to $99 million in December 2009), as well as lower interest rates $534 million in 2010 when compared to 2009. on the $2 billion of Series CG and CH notes issued to fund the two partial early redemptions of the U.S. dollar Notes, and the change in timing of semi-annual interest payments on the Series CH Notes to January and July as compared to June and December on the redeemed Notes. (See Section 7.3.)

66 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 7

. Wireless segment . Long-term debt issue in July 2010 with early partial redemption Capital expenditures decreased by $307 million in 2010 when of U.S. dollar Notes in September 2010 compared to 2009 due to the major activity in the prior year to On July 23, 2010, the Company successfully closed a public offering construct the HSPA+ network, which was substantially completed of 5.05%, Series CH Notes maturing in July 2020, for gross pro- and launched in November 2009, as well as lower expenditures ceeds of $1 billion. These Notes are redeemable at the option of the for the mature CDMA network. This was partly offset by new Company, in whole at any time, or in part from time to time, on not expenditures for increased capacity as well as the HSPA+ dual-cell fewer than 30 and not more than 60 days’ prior notice, at a redemp- technology project begun in the second half of 2010 that is expected tion price equal to the greater of (i) the present value of the Notes to approximately double the data download speed of the network. discounted at the Government of Canada yield plus 47 basis points, (See Section 2 – Building national capabilities.) or (ii) 100% of the principal amount thereof. In addition, accrued and Wireless capital intensity decreased to 9% in 2010 from 16% unpaid interest, if any, will be paid to the date fixed for redemption. in 2009. Wireless cash flow (EBITDA less capital expenditures) was Net proceeds of approximately $993 million were used to fund $1,568 million in 2010, up by $405 million or 35% year-over-year. the early partial redemption of U.S.$607 million of the Company’s . Wireline segment publicly held U.S. dollar, 8% Notes with a June 2011 maturity, as well Capital expenditures decreased by $75 million in 2010 when as payments to terminate cross currency interest rate swaps asso- compared to 2009 due to lower expenditures for the largely com- ciated with the redeemed Notes. The U.S. dollar Notes have an pleted ADSL2+ network technology upgrade, partly offset by effective interest rate of approximately 8.5%. The early redemption increased expenditures for TELUS Optik TV, VDSL2 and gigabit resulted in a third quarter, pre-tax charge of $52 million, or after tax, passive optical network (GPON) technology, pushing fibre deeper approximately $37 million or 12 cents per share. into the network and shortening loop lengths from the home, as These financing activities, as well as a similar Note issue and well as efficiency initiatives including service delivery improvement, early partial redemption in December 2009, reduced the face value of workforce management and purchase of a leased building to long-term debt maturing in June 2011 by approximately U.S.$1.2 bil- facilitate consolidation of contact centre real estate space. lion and extended the average maturity of long-term debt to 5.7 years Wireline capital intensity remained at 26% in 2010, unchanged at December 31, 2010 (five years at December 31, 2009). from 2009. Wireline cash flow (EBITDA less capital expenditures) . Long-term debt issues in May and December 2009 with early partial improved to $354 million in 2010, up by $129 million or 57% redemption of U.S. dollar Notes in December 2009 year-over-year. The comparative consolidated statement of cash flows for 2009 reflects a successful $700 million public offering in May of 4.95%, 7.3 Cash (used) provided by financing activities Series CF Notes maturing in May 2014. In December, the Company Net cash used by financing activities increased by $124 million in 2010 also successfully closed a $1 billion public offering of 5.05%, when compared to 2009. Series CG Notes maturing in December 2019. The net proceeds of . Cash from Common Shares and Non-Voting Shares issued was the December issue were used to fund the early partial redemption of $15 million in 2010 as compared to $1 million in 2009. U.S.$577 million of the Company’s publicly held U.S. dollar, 8% Notes . Cash dividends paid to holders of Common Shares and Non-Voting with a June 2011 maturity, as well as payments to terminate cross Shares were $473 million in 2010, comprised of dividends declared currency interest rate swaps associated with the redeemed Notes. net of amounts reinvested in TELUS Non-Voting Shares issued from

treasury at a 3% discount under the Company’s dividend reinvest- DEBT (REDUCTION) INCREASE, NET ($ millions) ment and share purchase (DRISP) program. In 2009, cash dividend payments were $602 million and no shares were issued from treasury 10 (402) in respect of reinvested dividends. Effective March 1, 2011, TELUS 0910 (132) will change the practice of issuing shares from treasury at a 3% discount and switch to purchasing shares from the open market 0809 1, 316

with no discount (see Section 4.3). De08bt increased in 2008 to help fund acquisitions and AWS spectrum purchases. . Bank facilities and commercial paper 07 The Company often shifts among short-term financing sources to take advantage of interest cost differentials. In 2010, commercial CA06SH RETURNED TO SHAREHOLDERS ($ millions) paper was reduced by $363 million to $104 million at December 31, 2010. No amounts were drawn against the 2012 credit facility at 10 642 December 31, 2010 (unchanged from December 31, 2009). 0910 601 In 2009, commercial paper increased by $35 million to $467 mil- 0809 584 280 864 lion at December 31, while net amounts drawn on the 2012 credit facility were reduced by $980 million to $nil in the second quarter of 08Dividends declared Normal course issuer bid 2009, primarily as a result of the successful Note issue in May 2009. 07 . Maturity and repayment of smaller debt issues in 2010 The Company repaid $50 million for matured 12% TCI Debentures 06 in May 2010 and $30 million for matured 11.5% TCI First Mortgage Bonds in July 2010.

TELUS 2010 annual report . 67 7.4 Liquidity and capital resource measures The EBITDA (excluding restructuring costs) interest coverage ratio

As at, or years ended, for 2010 was 7.3 times, up from 6.9 times in 2009, due mainly to lower December 31 2010 2009 Change redemption premiums on long-term debt and higher EBITDA before

Components of debt and restructuring costs, partly offset by net interest costs including lower coverage ratios(1) ($ millions) interest income from tax settlements. The ratios, adjusted to exclude Net debt 6,869 7,312 (443) losses on redemption of debt of $52 million in 2010 and $99 million Total capitalization – book value 15,088 14,959 129 in 2009, were 7.8 times and 8.5 times, respectively, in 2010 and 2009. EBITDA – excluding Free cash flow (FCF) increased by $462 million in 2010 when restructuring costs 3,717 3,681 36 compared to 2009. The increase resulted mainly from lower capital Net interest cost 510 532 (22) expenditures, higher EBITDA excluding restructuring costs and Debt ratios lower interest paid, partly offset by higher income tax payments and Fixed-rate debt as a proportion lower interest received on the settlement of prior years’ tax matters. of total indebtedness (%) 93 87 6 pts. See FCF details in Section 11.2. Average term to maturity of debt (years) 5.7 5.0 0.7 Net debt to total NET DEBT TO EBITDA capitalization (%)(1)(2) 45.5 48.9 (3.4) pts. 10 1.8 Net debt to EBITDA – excluding restructuring costs(1)(2) 1.8 2.0 (0.2) 1009 2.0

Coverage ratios (times)(1)(2) 0908 1. 9 Earnings coverage 3.8 3.1 0.7 EBITDA – excluding restructuring EBI08TDA excludes restructuring costs.

costs interest coverage 7.3 6.9 0.4 07 Other measures(2) 06 (3) EBITDA (EXCLUDING RESTRUCTURING COSTS) Free cash flow ($ millions) 947 485 462 INTEREST COVERAGE Dividend payout ratio(1) 10 7.3 of adjusted net earnings (%) 65 67 (2) pts. (1) Dividend payout ratio (%) 65 61 4 pts. 0910 6.9

(1) See Section 11.4 Definition and calculation of liquidity and capital resource measures. 0809 8.3 (2) See Section 8.2.4 for pro forma differences in measures under IFRS for fiscal 2010. Section 11.2 Free cash flow (3) See for the definition and calculation. Ex08cluding losses on debt redemption of $99 million in 2009 and $52 million in 2010, the ratio in 2009 was 8.5 times and the ratio in 2010 was 7.8 times. The decrease in Net debt at December 31, 2010, as compared to 07 one year earlier, includes maturity and repayment of $80 million of long- The Company’s strategy is to maintain the financial policies and term debt in 2010, a reduction in commercial paper, reduced proceeds 06 guidelines set out below. The Company believes that these measures from securitized accounts receivable and partial redemption of U.S. are currently at the optimal level and by maintaining credit ratings dollar Notes in September 2010, offset by a Note issue in July 2010. in the range of BBB+ to A–, or the equivalent, are expected to provide The $129 million increase in total capitalization resulted from increased reasonable access to capital markets. retained earnings and Non-Voting Share capital, partly offset by TELUS’ long-term financial policies and guidelines are: lower net debt. . Net debt to EBITDA – excluding restructuring costs of 1.5 to 2.0 times The proportion of debt on a fixed-rate basis was 93% at December 31, The ratio at December 31, 2010 was 1.8 times. 2010, up from 87% one year earlier primarily due to lower outstanding . Dividend payout ratio target guideline of 55 to 65% of sustainable commercial paper. The average term to maturity of debt was 5.7 years net earnings at December 31, 2010, up from 5.0 years at December 31, 2009, primarily The target guideline is on a prospective basis, rather than on a trailing due to the 10-year Note issue in July 2010 and the early partial redemp- basis. The current guideline was approved by the Board on May 4, tion in September 2010 of U.S. dollar Notes due June 1, 2011. 2010, and signals management and Board confidence in the outlook The earnings coverage ratio was 3.8 times in 2010, up from 3.1 times of the Company. The previous guideline was 45 to 55%. in 2009. A decrease in long-term interest expense, including losses on long-term debt redemption, increased the ratio by 0.6, and higher income before income taxes and long-term interest expense increased the ratio by 0.1.

68 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 7

7.5 Credit facilities less than 2 to 1 (approximately 7.3 to 1 at December 31, 2010) at the At December 31, 2010, TELUS had available liquidity exceeding $1.8 bil- end of any financial quarter. There are certain minor differences in lion from unutilized credit facilities, as well as availability of $100 million the calculation of the Leverage Ratio and Coverage Ratio under the credit under its accounts receivable securitization program (see Section 7.6), agreements as compared with the calculation of Net debt to EBITDA consistent with the Company’s objective of generally maintaining at least and EBITDA interest coverage. Historically, the calculations have not $1 billion of available liquidity. been materially different. The covenants are not impacted by revaluation TELUS’ revolving credit facilities contain customary covenants, of property, plant and equipment, intangible assets and goodwill for including a requirement that TELUS not permit its consolidated Leverage accounting purposes. See Business policy assessment in Section 8.2.5 Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately for discussion of the covenants after TELUS’ changeover to IFRS on 1.8 to 1 at December 31, 2010) and not permit its consolidated Coverage January 1, 2011. Continued access to TELUS’ credit facilities is not con- Ratio (EBITDA to interest expense on a trailing 12-month basis) to be tingent on the maintenance by TELUS of a specific credit rating.

TELUS credit facilities Outstanding Backstop At December 31, 2010 undrawn letters for commercial Available ($ millions) Expiry Size Drawn of credit paper program liquidity

Five-year revolving facility(1) May 1, 2012 2,000 – (117) (104) 1,779 Other bank facilities – 61 (2) (3) – 56 Tot a l – 2,061 (2) (120) (104) 1,835

(1) Canadian dollars or U.S. dollar equivalent.

7.6 Accounts receivable sale serviced basis, a servicing liability is recognized on the date of sale TELUS Communications Inc. (TCI), a wholly owned subsidiary of and is, in turn, amortized to earnings over the expected life of the TELUS, is a party to an agreement with an arm’s-length securitization trade receivables. trust associated with a major Schedule I Canadian bank, under TCI is required to maintain at least a BBB (low) credit rating which TCI is able to sell an interest in certain of its trade receivables, by DBRS Ltd. or the securitization trust may require the sale program for an amount up to a maximum of $500 million. As a result of to be wound down. The necessary credit rating was exceeded as selling the interest in certain of the trade receivables on a fully of February 24, 2011.

Balance of proceeds from securitized receivables

Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 ($ millions) 2010 2010 2010 2010 2009 2009 2009 2009

400 400 400 400 500 400 400 300

7.7 Credit ratings TELUS believes its adherence to its stated financial policies and the resulting investment grade credit ratings, coupled with its efforts to main- tain a constructive relationship with banks, investors and credit rating agencies, continue to provide reasonable access to capital markets. (See Section 10.6 Financing and debt requirements.)

TELUS 2010 annual report . 69 7.8 Financial instruments, commitments and contingent liabilities

Financial instruments (Note 5 of the Consolidated financial statements) The Company’s financial instruments and the nature of risks that they may be subject to are set out in the following table:

Risks

Market risks

Financial instrument Credit Liquidity Currency Interest rate Other price

Measured at cost or amortized cost Cash and temporary investments X X X Accounts receivable X X Accounts payable X X Restructuring accounts payable X Short-term obligations X X Long-term debt X X X

Measured at fair value Short-term investments X X Long-term investments X

Foreign exchange derivatives(1) X X X

Share-based compensation derivatives(1) X X X

Cross currency interest rate swap derivatives(1) X X X X

(1) Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only) and sets criteria for the creditworthiness of the transaction counterparties.

Credit risk Aside from the normal customer accounts receivable credit risk Credit risk associated with cash and temporary investments is minimized associated with its retained interest, the Company has no continuing substantially by ensuring that these financial assets are placed with exposure to credit risk associated with its trade receivables, which governments, major financial institutions that have been accorded strong are sold to an arm’s-length securitization trust. investment grade ratings by a primary rating agency, and/or other credit- Counterparties to the Company’s cross currency interest rate swap worthy counterparties. An ongoing review is performed to evaluate agreements, share-based compensation cash-settled equity forward changes in the status of counterparties. agreements and foreign exchange derivatives are major financial institu- Credit risk associated with accounts receivable is minimized by the tions that have all been accorded investment grade ratings by a primary Company’s large and diverse customer base, which covers substantially rating agency. The dollar amount of credit exposure under contracts with all consumer and business sectors in Canada. The Company follows any one financial institution is limited and counterparties’ credit ratings a program of credit evaluations of customers and limits the amount of are monitored. The Company does not give or receive collateral on swap credit extended when deemed necessary. The Company maintains agreements and hedging items due to its credit rating and those of its allowances for potential credit losses, and any such losses to date have counterparties. While the Company is exposed to credit losses due to been within management’s expectations. As at December 31, 2010, the non-performance of its counterparties, the Company considers the the weighted average life of past-due customer accounts receivable risk of this remote. The Company’s derivative liabilities do not have credit- is 59 days (2009 – 72 days). risk-related contingent features. The Company must make significant estimates in respect of the Liquidity risk allowance for doubtful accounts. Current economic conditions, historical As a component of capital structure financial policies, discussed under information, why the accounts are past due and line of business from Section 4.3 Liquidity and capital resources, the Company manages which the customer accounts receivable arose are all considered when liquidity risk by maintaining a daily cash pooling process, which enables determining whether past-due accounts should be allowed for; the the Company to manage its liquidity surplus and liquidity requirements same factors are considered when determining whether to write off according to the actual needs of the Company and its subsidiaries, amounts charged to the allowance account against the customer by maintaining bilateral bank facilities and syndicated credit facilities, account receivable. The provision for doubtful accounts is calculated by maintaining a commercial paper program, by the sales of trade on a specific-identification basis for customer accounts receivable receivables to an arm’s-length securitization trust, by continuously over a specific balance threshold and on a statistically derived allowance monitoring forecast and actual cash flows and by managing maturity basis for the remainder. No customer accounts receivable are written profiles of financial assets and financial liabilities. off directly to the provision for doubtful accounts.

70 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 7

The Company has significant debt maturities in future years. As at Similar to fixed-rate debt, the fair value of the Company’s cross December 31, 2010, the Company has access to a shelf prospectus, currency interest rate swap derivatives fluctuates with changes in in effect until October 2011, pursuant to which it can offer $2 billion market interest rates as the interest rate swapped to is fixed; absent of debt or equity securities. The Company has credit facilities available, early redemption, the related future cash flows do not change due including a $2 billion facility until 2012 (see Section 7.5 Credit facilities). to changes in market interest rates. The Company believes that its investment grade credit ratings provide Other price risk reasonable access to capital markets. If the balance of short-term investments includes equity instruments, Currency risk the Company would be exposed to equity price risks. The Company The Company’s functional currency is the Canadian dollar, but it is exposed to equity price risks arising from long-term investments regularly transacts in U.S. dollars due to certain routine revenues and classified as available-for-sale. Such investments are held for strategic operating costs being denominated in U.S. dollars, as well as sourcing rather than trading purposes. some inventory purchases and capital asset acquisitions internationally. The Company is exposed to other price risk arising from cash- The U.S. dollar is the only foreign currency to which the Company settled share-based compensation (appreciating Common Share and has a significant exposure. Non-Voting Share prices increase both the expense and the potential The Company’s foreign exchange risk management includes the cash outflow). Cash-settled equity swap agreements have been entered use of foreign currency forward contracts and currency options to fix into that establish a cap on the Company’s cost associated with its the exchange rates on short-term U.S. dollar denominated transactions net-cash settled share options and fix the Company’s cost associated and commitments. Hedge accounting is applied to these short-term with its restricted stock units. foreign currency forward contracts and currency options on an exception Market risk basis only. Net income and other comprehensive income for the years ended The Company is also exposed to currency risks in that the fair December 31, 2010 and 2009, could have varied if the Canadian dollar value or future cash flows of its U.S. dollar denominated long-term debt to U.S. dollar foreign exchange rates, market interest rates and the will fluctuate because of changes in foreign exchange rates. Currency Company’s Common Share and Non-Voting Share prices varied by hedging relationships have been established for the related semi-annual reasonably possible amounts from their actual statement of financial interest payments and principal payment at maturity. position date values. Interest rate risk The sensitivity analysis of the Company’s exposure to currency risk, Changes in market interest rates will cause fluctuations in the fair value interest rate risk and other price risk arising from share-based compen- or future cash flows of temporary investments, short-term investments, sation is shown in Note 5(g) of the Consolidated financial statements. short-term obligations, long-term debt and/or cross currency interest rate Fair value swap derivatives. The carrying value of cash and temporary investments, accounts When the Company has temporary investments, they have short receivable, accounts payable, restructuring accounts payable and short- maturities and fixed rates, thus their fair value will fluctuate with changes term obligations approximates their fair values due to the immediate in market interest rates; absent monetization prior to maturity, the related or short-term maturity of these financial instruments. The carrying values future cash flows do not change due to changes in market interest rates. of the Company’s investments accounted for using the cost method If the balance of short-term investments includes debt instruments do not exceed their fair values. and/or dividend-paying equity instruments, the Company could be The carrying value of short-term investments, if any, equals their fair exposed to interest rate risks. value as they are classified as held for trading. The fair value is determined As short-term obligations arising from bilateral bank facilities, which directly by reference to quoted market prices in active markets. typically have variable interest rates, are rarely outstanding for periods The fair values of the Company’s long-term debt are based on that exceed one calendar week, interest rate risk associated with this quoted market prices in active markets. The fair values of the Company’s item is not material. derivative financial instruments used to manage exposure to interest In respect of the Company’s currently outstanding long-term debt, rate and currency risks are estimated based on quoted market prices other than for commercial paper and amounts drawn on its credit facilities, in active markets for the same or similar financial instruments or on the it is all fixed-rate debt. The fair value of fixed-rate debt fluctuates with current rates offered to the Company for financial instruments of the changes in market interest rates; absent early redemption and/or foreign same maturity as well as the use of discounted future cash flows using exchange rate fluctuations, the related future cash flows do not change. current rates for similar financial instruments subject to similar risks Due to the short maturities of commercial paper, its fair values are and maturities. not materially affected by changes in market interest rates but its cash The fair values of the Company’s derivative financial instruments flows representing interest payments may be if the commercial paper used to manage exposure to increases in compensation costs arising is rolled over. from certain forms of share-based compensation are based upon Amounts drawn on the Company’s short-term and long-term credit fair value estimates of the related cash-settled equity forward agreements facilities will be affected by changes in market interest rates in a manner provided by the counterparty to the transactions (such fair value esti- similar to commercial paper. mates being largely based upon the Company’s Common Share and Non-Voting Share prices as at the statement of financial position dates).

TELUS 2010 annual report . 71 Commitments and contingent liabilities

Contractual obligations The Company’s known contractual obligations at December 31, 2010, are quantified in the following table. Interest obligations are included in long-term debt maturities. See Capabilities – Section 4.3 Liquidity and capital resources for a chart of long-term debt principal maturities through 2025.

Long-term debt maturities(1)

All except Operating Purchase Other long-term ($ millions) capital leases Capital leases leases(2) obligations(3) obligations(4)(5) Tot a l

2 011 1,488 8 285 1,291 19 3,091 2012 701 – 253 833 42 1,829 2013 583 – 235 360 31 1,209 2014 958 – 214 102 21 1,295 2015 851 – 200 92 22 1,165 Thereafter 4,266 – 1,146 526 185 6,123 Tot a l 8,847 8 2,333 3,204 320 14,712

(1) Where applicable, debt maturities reflect hedged foreign exchange rates as at December 31, 2010. Interest payment cash outflows in respect of commercial paper have been calculated based on rates in effect as at December 31, 2010. (2) Of the total minimum operating lease payments of $2,333 million, $2,291 million was in respect of land and buildings; approximately 57% was in respect of the Company’s five largest operating leases, all of which were for office premises over various terms, with expiry dates that range between 2016 and 2026. See Note 20(a) of the Consolidated financial statements for further details on operating leases. (3) Where applicable, purchase obligations reflect foreign exchange rates as at the current year-end, December 31, 2010. Purchase obligations include future operating and capital expenditures that have been contracted for as at the current year-end and include the most likely estimates of prices and volumes, where necessary. As purchase obligations reflect market conditions at the time the obligation was incurred for the items being purchased, they may not be representative of future years. Obligations from personnel supply contracts and other such labour agreements have been excluded. (4) Items that do not result in a future outlay of economic resources, such as deferred gains on sale-leasebacks of buildings and deferred customer activation and connection fees, have been excluded. (5) Uncertain income tax positions that could result in current income taxes being payable have been, or will be, substantially funded over the next 12 months.

Guarantees (Note 20(c) of the Consolidated financial statements) assessment and information presently available, that it is unlikely that Canadian GAAP requires the disclosure of certain types of guarantees any liability, to the extent not provided for through insurance or otherwise, and their maximum, undiscounted amounts. As at December 31, 2010, would be material in relation to the Company’s consolidated financial the Company’s maximum undiscounted guarantee amounts, without position, excepting the items disclosed in Note 20(d) of the Consolidated regard for the likelihood of having to make such payment, were financial statements and Section 10.9 Litigation and legal matters. not material. In the normal course of operations, the Company may provide 7.9 Outstanding share information indemnification in conjunction with certain transactions. Other than The total number of outstanding and issuable shares in the following obligations recorded as liabilities at the time of the transaction, table assumes full conversion of outstanding options and shares historically the Company has not made significant payments under reserved for future option grants, at January 31, 2011. these indemnifications. In connection with its 2001 disposition of TELUS’ directory business, Outstanding shares the Company agreed to bear a proportionate share of the new owner’s Common Non-Voting Tot a l (millions) Shares Shares shares increased directory publication costs if the increased costs were to arise from a change in the applicable CRTC regulatory requirements. Common equity The Company’s proportionate share is 40% through May 2011 and Outstanding shares at December 31, 2010 174.9 147.5 322.4(1) then 15% in the final five years, ending May 2016. As well, should the CRTC take any action that would result in the owner being prevented Outstanding shares at from carrying on the directory business as specified in the agreement, January 31, 2011 174.9 148.9 323.8 TELUS would indemnify the owner in respect of any losses that the Options outstanding and issuable(2) at January 31, 2011 – 29.2 29.2 owner incurred. As at December 31, 2010, the Company has no liability recorded in respect of indemnification obligations. Outstanding and issuable shares at January 31, 2011 174.9 178.1 353.0 Claims and lawsuits (1) For the purposes of calculating diluted earnings per share, the number of shares A number of claims and lawsuits (including class actions) seeking was 321.0 million in 2010. damages and other relief are pending against the Company. As well, (2) Assuming full conversion and ignoring exercise prices. the Company has received or is aware of certain potential claims Outstanding shares at January 31, 2011, include an increase of approxi- (including intellectual property infringement claims) against the Company mately 1.25 million TELUS Non-Voting Shares issued from treasury and, in some cases, numerous other wireless carriers and telecommu- under the DRISP for the dividend paid on January 4, 2011. The DRISP nications service providers. In some instances, the matters are at a participation rate was approximately 32% for the January 4 dividend. preliminary stage and the potential for liability and magnitude of potential TELUS will discontinue the current practice of the issuance of shares loss cannot be readily determined currently. It is impossible at this from treasury at a 3% discount for reinvesting dividends, and will time for the Company to predict with any certainty the outcome of any commence purchases on the open market without discount, effective such claims, potential claims and lawsuits. However, subject to the March 1, 2011. (See Section 4.3.) foregoing limitations, management is of the opinion, based upon legal

72 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY DEVELOPMENTS Accounting estimates that are critical to determining financial results; and a summary 8 of differences arising because of the convergence of Canadian GAAP with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB), including unaudited pro forma quantified transition effects

8.1 Critical accounting estimates Unless otherwise specified in the discussion of the specific critical TELUS’ significant accounting policies are described in Note 1 of the accounting estimates, it is expected that no material changes in Consolidated financial statements. The preparation of financial statements overall financial performance and financial statement line items would in conformity with generally accepted accounting principles requires arise either from reasonably likely changes in material assumptions management to make estimates. Management’s estimates affect the underlying the estimate or from selection of a different estimate from reported amounts of assets and liabilities and disclosure of contingent within a valid range of estimates. assets and liabilities at the date of the financial statements, as well . All critical accounting estimates are uncertain at the time of making as the reported amounts of revenues and expenses during the reporting the estimate and affect the following Consolidated statements of period. Actual results could differ from those estimates. The Company’s income and other comprehensive income line items: Income taxes critical accounting estimates are described below and are generally (except for estimates about goodwill) and Net income. Similarly, all discussed with the Audit Committee each quarter, and refer to Canadian critical accounting estimates affect the following Consolidated state- GAAP and IFRS-IASB where noted. ments of financial position line items: Current assets (Income and other taxes receivable); Current liabilities (Income and other taxes General payable and Current portion of future income taxes (as currently . The Company has considered in determining its critical accounting reported)); Future income tax liabilities (Deferred income tax liabilities estimates, trends, commitments, events or uncertainties that it under IFRS-IASB); and Common Share and Non-Voting Share reasonably expects to materially affect the methodology or assump- equity (retained earnings). The discussion of each critical accounting tions, subject to the items identified in the Caution regarding estimate does not differ between the Company’s two segments, forward-looking statements section of this MD&A. wireless and wireline, unless explicitly noted. . In the normal course, changes are made to assumptions underlying . For fiscal year 2010, critical accounting estimates affected line items all critical accounting estimates to reflect current economic conditions, on the Consolidated statements of income and other comprehensive updating of historical information used to develop the assumptions income, and line items on the Consolidated statements of financial and changes in the Company’s credit ratings, where applicable. position, as follows:

Consolidated statements of income and other comprehensive income

Operating expenses

Operating Amortization of Other Consolidated statements of financial position revenues Operations Depreciation intangible assets expense, net

Accounts receivable X Inventories X Property, plant and equipment, net X

Intangible assets, net, and Goodwill, net(1) X Investments X Price cap deferral account Advance billings and customer deposits X Other long-term liabilities X

Employee defined benefit pension plans X X(2) X(2)

(1) Accounting estimate, as applicable to intangible assets with indefinite lives and goodwill, primarily affects the Company’s wireless segment. (2) Accounting estimate impact due to internal labour capitalization rates.

TELUS 2010 annual report . 73 . After changeover to IFRS on January 1, 2011, described and illustrated in Section 8.2, the Company’s critical accounting estimates affect line items on the Consolidated statements of income and other comprehensive income items, and line items on the Consolidated statements of financial position, as follows: Consolidated statements of income and other comprehensive income (IFRS-IASB)

Other

comprehensive Operating expenses income (Item never Goods and Employee Amortization subsequently Consolidated statements of Operating services benefits of intangible reclassified financial position (IFRS-IASB) revenues purchased expense Depreciation assets to income)

Accounts receivable X Short-term borrowings (securitized accounts receivable) X Inventories X Property, plant and equipment, net X

Intangible assets, net, and Goodwill, net(1) X Investments X Price cap deferral account Advance billings and customer deposits X Provisions (non-current liabilities) X

Employee defined benefit pension plans X X(2) X(2) X

(1) Accounting estimate, as applicable to intangible assets with indefinite lives and goodwill, primarily affects the Company’s wireless cash generating unit. (2) Accounting estimate impact due to internal labour capitalization rates.

Accounts receivable Key economic assumptions used to determine the fair value of residual cash flows arising from accounts General receivable securitization . The Company considers the business area that gave rise to the . The estimate of the Company’s fair value of its retained interest accounts receivable, performs statistical analysis of portfolio delin- could materially change from period to period due to the quency trends and performs specific account identification when fair value estimate being a function of the amount of accounts determining its allowance for doubtful accounts. This information is receivable sold, which can vary on a monthly basis. See Note 14 also used in conjunction with current market-based rates of borrowing of the Consolidated financial statements for further analysis. to determine the fair value of its residual cash flows arising from accounts receivable securitization. The fair value of the Company’s The allowance for doubtful accounts residual cash flows arising from the accounts receivable securitization . The estimate of the Company’s allowance for doubtful accounts is also referred to as its retained interest. As described further in could materially change from period to period due to the Section 8.2.1, proceeds from the sale of accounts receivable are allowance being a function of the balance and composition of recorded as Short-term borrowings under IFRS-IASB, rather than accounts receivable, which can vary on a month-to-month basis. a reduction of Accounts receivable (or de-recognition) under The variance in the balance of accounts receivable can arise Canadian GAAP. from a variance in the amount and composition of operating . Assumptions underlying the allowance for doubtful accounts include revenues, from a variance in the amount of accounts receivable portfolio delinquency trends and specific account assessments sold to the securitization trust and from variances in accounts made when performing specific account identification. Assumptions receivable collection performance. underlying the determination of the fair value of residual cash flows arising from accounts receivable securitization include those Inventories developed when determining the allowance for doubtful accounts The allowance for inventory obsolescence as well as the effective annual discount rate. . The Company determines its allowance for inventory obsolescence . These accounting estimates are in respect of the Accounts based upon expected inventory turnover, inventory aging, and current receivable line item on the Company’s Consolidated statements and future expectations with respect to product offerings. of financial position comprising approximately 5% of Total assets . Assumptions underlying the allowance for inventory obsolescence as at December 31, 2010 (4% as at December 31, 2009). Based include future sales trends and offerings and the expected inventory on unaudited pro forma IFRS-IASB financial information, Accounts requirements and inventory composition necessary to support receivable are approximately 7% of Total assets at December 31, these future sales offerings. The estimate of the Company’s allow- 2010 (approximately 6% at January 1, 2010). If the future were to ance for inventory obsolescence could materially change from adversely differ from management’s best estimates of the fair value period to period due to changes in product offerings and consumer of the residual cash flows and the allowance for doubtful accounts, acceptance of those products. the Company could experience a bad debt charge in the future. Such a bad debt charge does not result in a cash outflow.

74 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

. This accounting estimate is in respect of the Inventories line item The recoverability of intangible assets with indefinite lives; on the Company’s Consolidated statements of financial position, the recoverability of goodwill which comprises approximately 1% of Total assets at December 31, . The carrying value of intangible assets with indefinite lives, and 2010 and 2009. Based on unaudited pro forma IFRS-IASB finan- goodwill, is periodically tested for impairment and this test represents cial information, Inventories are approximately 1% of Total assets a significant estimate for the Company. at December 31 and January 1, 2010. If the allowance for inventory . There is a material degree of uncertainty with respect to the esti- obsolescence were inadequate, the Company could experience mates of the reporting units’ fair values given the necessity of making a charge to operations expense in the future. Such an inventory key economic assumptions about the future. The fair value calculation obsolescence charge does not result in a cash outflow. uses discounted cash flow projections that employ the following key assumptions: future cash flows and growth projections, including Property, plant and equipment, net; economic risk assumptions and estimates of achieving key operating Intangible assets, net; and Goodwill, net metrics and drivers; the future weighted average cost of capital; and earnings multiples. General . See Note 16(d) of the Consolidated financial statements for further . The Property, plant and equipment, net, line item on the Company’s discussion of methodology and sensitivity testing. Consolidated statements of financial position represents approxi- mately 39% of Total assets, as at December 31, 2010 (40% as at Investments December 31, 2009). Based on unaudited pro forma IFRS-IASB finan- cial information, Property, plant and equipment, net, is approximately The recoverability of long-term investments 40% of Total assets at December 31 and January 1, 2010. . The Company assesses the recoverability of its long-term investments . The Intangible assets, net, line item represents approximately 26% on a regular, recurring basis. The recoverability of investments is of Total assets, as at December 31, 2010 (27% as at December 31, assessed on a specific identification basis taking into consideration 2009). Included in Intangible assets, wireless spectrum licences expectations about future performance of the investments and represent approximately 20% of Total assets, as at December 31, comparison of historical results to past expectations. 2010 and 2009. Based on unaudited pro forma IFRS-IASB financial . The most significant assumptions underlying the recoverability of information, Intangible assets are approximately 31% of Total assets long-term investments are the achievement of future cash flow at December 31, 2010 (approximately 32% at January 1, 2010), and operating expectations. The estimate of the Company’s recover- with included wireless spectrum licences being approximately 25% ability of long-term investments could change from period to period of Total assets at December 31 and January 1, 2010. due to the recurring nature of the recoverability assessment and . The Goodwill line item represents approximately 18% of Total assets, due to the nature of long-term investments (the Company does not as at December 31, 2010 (19% as at December 31, 2009). Based control the investees). on unaudited pro forma IFRS-IASB financial information, Goodwill . If the allowance for recoverability of long-term investments were represents approximately 18% of Total assets at December 31 inadequate, the Company could experience an increased charge to and January 1, 2010. Other operating income in the future. Such a provision for recoverability . If TELUS’ estimated useful lives of assets were incorrect, it could of long-term investments does not result in a cash outflow. experience increased or decreased charges for amortization of intangible assets or depreciation in the future. If the future were to Income tax assets and liabilities adversely differ from management’s best estimate of key economic The amount and composition of income tax assets and assumptions and associated cash flows were to materially decrease, income tax liabilities, including the amount of unrecognized the Company could potentially experience future material impair- tax benefits ment charges in respect of its property, plant and equipment assets, . Assumptions underlying the composition of income tax assets and its intangible assets or its goodwill. If intangible assets with indefinite liabilities, including the amount of unrecognized tax benefits, are lives were determined to have finite lives at some point in the future, based upon an assessment of tax positions as to whether, on their the Company could experience increased charges for amortization technical merit, they are more likely than not of being sustained of intangible assets. Such charges do not result in a cash outflow and upon examination, and then an estimate of the amount of tax benefit of themselves would not affect the Company’s immediate liquidity. that is greater than 50% likely of being realized upon ultimate settle- The estimated useful lives of assets; the recoverability ment with taxing authorities. Such assessments are based upon of tangible assets the applicable income tax legislation, regulations and interpretations, . The estimated useful lives of assets are determined by a continuing all of which in turn are subject to interpretation. program of asset life studies. The recoverability of tangible assets . Current income tax assets and liabilities are estimated based is significantly impacted by the estimated useful lives of assets. upon the amount of tax that is calculated as being owed to taxing . Assumptions underlying the estimated useful lives of assets include authorities, net of periodic instalment payments. Future income the life cycle of technology, competitive pressures and future tax liabilities are comprised of the tax effect of temporary differ- infrastructure utilization plans. ences between the carrying amount and tax basis of assets and liabilities as well as the tax effect of undeducted tax losses.

TELUS 2010 annual report . 75 The timing of the reversal of the temporary differences is estimated The Company is supporting Bell Canada’s request to the CRTC to and the tax rate substantively enacted for the periods of reversal review and vary the determination of interest, since consumer group is applied to the temporary differences. The carrying amounts of court appeals and the extended Commission review process for assets and liabilities are based upon the amounts recorded in the communities proposed by the ILECs for broadband expansion con- financial statements and are therefore subject to accounting esti- tributed to the delay in the CRTC’s decision on the disposition of mates that are inherent in those balances. The tax basis of assets the deferral account balance. and liabilities, as well as the amount of undeducted tax losses, The CRTC directed TELUS to rebate approximately $54 million are based upon the assessment of tax positions and measurement to residential customers in non-high cost serving areas (urban areas), of tax benefits as noted above. Assumptions as to the timing of allowing the Company flexibility in the method of rebate, including reversal of temporary differences include expectations about the promotional offerings for related or unrelated products or services future results of operations and cash flows. The composition of of greater value than a cash rebate – such promotions to be con- income tax liabilities is reasonably likely to change from period to cluded by the end of February 2011. The CRTC also approved that period because of changes in the estimation of these significant the remaining deferral account balance of $111 million be used to: uncertainties. (i) expand broadband services to 159 rural and remote communities . This accounting estimate is in respect of material asset and in Alberta, British Columbia and Eastern Quebec over a period liability line items on the Company’s Consolidated statements of ending in 2014; and (ii) improve accessibility of telecommunications financial position comprising less than 1% of Total assets and services for individuals with disabilities. approximately 9% of Total liabilities and owners’ equity at . The balance of the deferral account was $162 million at December 31, December 31, 2010 and 2009. Based on unaudited pro forma 2010. The critical accounting estimates for extinguishing the balance IFRS-IASB financial information, this accounting estimate is in of the deferral account that are uncertain at the time of making the respect of material asset and liability line items comprising less than estimate include determining over what period of time qualifying 1% of Total assets and approximately 9% of Total liabilities and deferred amounts will be recognized in the Company’s Consolidated owners’ equity at December 31 and January 1, 2010. If the future statements of income and comprehensive income. The balance of were to adversely differ from management’s best estimate of the deferral account not rebated to customers will be used to build the likelihood of tax positions being sustained, the amount of tax and provide broadband services in remote and rural areas, as well as benefit that is greater than 50% likely of being realized, the future for accessibility initiatives. Such amounts will be recognized in revenues results of operations, the timing of reversal of deductible temporary over a period extending beyond 2014, but will not be accompanied differences and taxable temporary differences, and the tax rates by corresponding cash inflows. Rebates refunded to customers from applicable to future years, the Company could experience material the deferral account were expected to be completed by the end of future income tax adjustments. Such future income tax adjustments the first quarter of 2011 and do not impact TELUS’ Net income. could result in an acceleration of cash outflows at an earlier time . This accounting estimate is in respect of an item within the Advance than might otherwise be expected. billings and customer deposits and Other long-term liabilities line items on TELUS’ Consolidated statements of financial position. The total Advance billings and customer deposits / deferral account balance comprised less than 1% of Total liabilities and Other long-term liabilities (Provisions under IFRS-IASB) owners’ equity at December 31, 2010 and 2009. Based on unaudited pro forma IFRS-IASB financial information, this accounting estimate The accruals for CRTC deferral account liabilities resides within the Advance billings and customer deposits and non- . The deferral account concept was introduced by the CRTC in 2002, current Provisions line items and comprises less than 1% of Total requiring the Company to maintain rates for residential basic services liabilities and owners’ equity at December 31 and January 1, 2010. provided in non-high cost serving areas, rather than lower the rates, and defer the income statement recognition of a portion of the monies Employee defined benefit pension plans received in a deferral account, from June 2002 to May 2006. The use of deferral account funds was restricted and subject to a number of Certain actuarial and economic assumptions used in court appeals including appeals to the Supreme Court of Canada by determining defined benefit pension costs, accrued pension consumer interest groups, Bell Canada and TELUS. The Supreme benefit obligations and pension plan assets Court dismissed all appeals in September 2009. . The Company reviews industry practices, trends, economic On August 31, 2010, in Telecom Decision 2010-639, the CRTC conditions and data provided by actuaries when developing finalized the deferral account balance for TELUS and issued its assumptions used in the determination of defined benefit pension determination on the use of the Company’s deferral account funds. costs and accrued pension benefit obligations. Pension plan The CRTC also determined that the deferral accounts should have assets are generally valued using market prices, however, some continued to accrue interest in 2010, whereas TELUS had accrued assets are valued using market estimates when market prices interest to May 31, 2006. This resulted in TELUS recording an addi- are not readily available. Defined benefit pension costs are also tional $15 million charge in Financing costs in the third quarter of 2010. affected by the quantitative methods used to determine estimated returns on pension plan assets. Actuarial support is obtained for interpolations of experience gains and losses that affect the defined benefit pension costs and accrued benefit obligations.

76 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

The discount rate, which is used to determine the accrued benefit This section discusses the Company’s expectations regarding the obligation, is based upon the yield on long-term, high-quality fixed changeover to IFRS-IASB. The term IFRS used in this MD&A is an term investments, and is set annually at the end of each calendar abbreviation of IFRS-IASB. year, based upon yields on long-term corporate bond indices in There can be no guarantee that the International Accounting consultation with actuaries. The expected long-term rate of return Standards Board will not make further pronouncements, and that the is based upon forecasted returns of the major asset categories Canadian Accounting Standards Board will also not adopt further and weighted by plans’ target asset allocations. Future increases pronouncements, before the Consolidated financial statements as at in compensation are based upon the current benefits policies December 31, 2011, are prepared. Consequently, there can be no and economic forecasts. guarantee that the standards used to prepare information in this Section . Assumptions used in determining defined benefit pension costs, will not differ from those used to prepare the Consolidated financial accrued pension benefit obligations and pension plan assets include: statements for the year ended December 31, 2011, and that the effects discount rates, long-term rates of return for plan assets, market esti- described and quantified below will not change. mates and rates of future compensation increases. Material changes in overall financial performance and financial statement line items Key dates would arise from reasonably likely changes, because of revised . January 1, 2010 (transition date): An opening statement of financial assumptions to reflect updated historical information and updated position according to IFRS was prepared, as at this date, to facilitate economic conditions, in the material assumptions underlying this the changeover to IFRS reporting in 2011. TELUS reported its fiscal estimate. See Note 13 of the Consolidated financial statements for 2010 and comparative 2009 results according to Canadian GAAP. further analysis. . January 1, 2011 (changeover date): The date after which TELUS . This accounting estimate is in respect of a component of the will prepare and report interim and annual 2011 financial statements Operating expenses line item on the Company’s Consolidated with 2010 comparatives according to IFRS. statements of income and other comprehensive income. If the future were to adversely differ from management’s best estimate As activities consistent with Canadian GAAP being converged of assumptions used in determining defined benefit pension with IFRS-IASB, the Company previously adopted new recommendations costs, accrued benefit obligations and pension plan assets, for Goodwill and intangible assets (CICA Handbook Section 3064), the Company could experience future increased (or decreased) Business combinations (CICA Handbook Section 1582), Consolidations defined benefit pension expense. In any given reporting period, (CICA Handbook Section 1601), Non-controlling interests (CICA actual returns on plan assets are likely to vary from the expected Handbook Section 1602), financial instrument disclosure and presen- long-term rate of return, resulting in fluctuations in Other compre- tation (CICA Handbook Sections 3862 and 3863), and Inventories hensive income – Item never subsequently reclassified to income. (CICA Handbook Section 3031). The remainder of this section is comprised of: 8.2 Accounting policy developments . Section 8.2.1 – Explanation of transition to IFRS-IASB In 2006, Canada’s Accounting Standards Board ratified a strategic . Section 8.2.2 – Quantified effects on consolidated statements plan that results in Canadian GAAP, as used by publicly accountable of financial position enterprises, being fully converged with International Financial Reporting . Section 8.2.3 – Quantified effects on consolidated statement Standards as issued by the International Accounting Standards of income and other comprehensive income Board (IFRS-IASB), over a transitional period to be complete by 2011. . Section 8.2.4 – Effects on other measures . Section 8.2.5 – Changeover status.

TELUS 2010 annual report . 77 8.2.1 Explanation of the transition to IFRS-IASB provides a series of optional exemptions from retrospective application The transition to IFRS requires the Company to apply IFRS 1 (First-Time to ease the transition to the full set of IFRS. Adoption of International Financial Reporting Standards), which sets out The Company has also determined the areas where changes in the procedures for preparing IFRS-compliant financial statements in accounting policy are expected. The following table discusses qualitative the first reporting period after the changeover date. IFRS 1 applies only transition effects and quantifies the impacts, net of applicable income at the time of changeover and includes a requirement for retrospective tax, on Owners’ equity at the transition date and on Net income for the application of each standard as if they were always in effect. IFRS 1 also year ended December 31, 2010.

Effects of transition

Unaudited Unaudited pro forma effect pro forma effect on Owners’ equity on Net income (Section 8.2.2) (Section 8.2.3) Description and impacts As at Year ended Topic ($ millions – increase (decrease)) Jan. 1, 2010 Dec. 31, 2010 Employee benefits – defined benefit plans . Recognition of cumulative IFRS 1 optional exemption taken: Yes. unamortized actuarial gains Transition date impact: The Company has chosen to recognize cumulative and losses, past service unamortized actuarial gains and losses at the transition date as an adjustment costs, and transitional to Retained earnings on the same date. obligations and assets at the transition date In addition, as part of the retrospective application of IAS 19, all vested past service costs and transitional obligations and assets at the transition date were similarly adjusted through Retained earnings at the transition date.

As at January 1, 2010

Other long-term assets (1,314) Other long-term liabilities 142 Deferred income tax liability (379) Retained earnings (1,077) (1,077) . Recognition of ongoing Difference from Canadian GAAP; ongoing impact: IFRS currently allows actuarial gains and losses an accounting policy choice for recognition of actuarial gains and losses arising subsequent to the transition date. The Company has chosen to charge all actuarial gains and losses to Other comprehensive income, consistent with changes proposed in an exposure draft for employee benefits – recognition and measurement of actuarial gain or losses for defined benefit plans. The exposure draft proposes to eliminate other choices for recognizing ongoing actuarial gains and losses.

Canadian GAAP required that the excess of the net actuarial gain (loss) over 10% of the greater of the accrued benefit obligation and fair value of the plan assets was to be amortized over the expected average remaining service periods of active employees of the plan, as were past service costs and transitional assets and liabilities.

Year ended December 31, 2010

Employee benefits expense (39) Income taxes 10 Net income 29 29

78 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

Effects of transition

Unaudited Unaudited pro forma effect pro forma effect on Owners’ equity on Net income (Section 8.2.2) (Section 8.2.3) Description and impacts As at Year ended Topic ($ millions – increase (decrease)) Jan. 1, 2010 Dec. 31, 2010

Impairment of assets Difference from Canadian GAAP: IFRS requires that increases in recoverable amounts of impaired assets subsequent to the time of impairment be recognized as an impairment reversal (except for goodwill), but only to the extent that the resulting carrying amount would not exceed the carrying amount that would have existed had an impairment amount not initially been recognized. Canadian GAAP did not allow for increases in recoverable amounts of impaired assets subsequent to the time of impairment to be recognized. IFRS requires, given the Company’s facts and circumstances, that the Company’s spectrum licences be assessed for impairment as a part of the Wireless cash- generating unit. The result is that the $910 million impairment recorded by the Company in 2002 would not have been required under IFRS. Previously, given the Company’s facts and circumstances, the application of Canadian GAAP resulted in the Company’s spectrum licences being assessed for impairment separately. Transition date impact: In addition to impairment reversals, IFRS transitional rules require the amortization cessation for intangible assets with indefinite lives to be accounted for retrospectively with the result being the reversal of the amortization previously recorded under Canadian GAAP. When Canadian GAAP introduced impairment of assets for intangible assets with indefinite lives, it concurrently ceased requiring their amortization on a prospective basis and thus $108 million of associated amortization recorded to then by the Company was not reversed. The Company has also recorded impairment reversals, net of accumulated depreciation of $91 million at the transition date for certain property, plant and equipment impairments recorded by predecessor companies. As at January 1, 2010

Property, plant and equipment, net 91 Intangible assets, net (impairment reversal) 910 Intangible assets, net (amortization reversal) 108 Deferred income tax liability 281 Retained earnings 828 828 Ongoing impact: The transition date impairment reversal for property, plant and equipment impairment recorded in predecessor companies results in a minor increase in depreciation expense. Volatility in Net income could result from periodic impairment tests, should the facts support a future impairment.

Year ended December 31, 2010

Depreciation 5 Income taxes (1) Net income (4) (4) Sale of accounts receivable Difference from Canadian GAAP: IFRS does not permit de-recognition of the accounts receivable sold to an arm’s-length securitization trust, given the Company’s facts and circumstances. IFRS considers the sale proceeds to be short-term borrowings of the Company. Canadian GAAP de-recognized accounts receivable sold to the arm’s-length securitization trust with which the Company transacts. Transition date impact: Proceeds from the sale of accounts receivable under the Company’s accounts receivable securitization agreement are recorded as short-term borrowings, rather than a reduction of Accounts receivable (or de-recognition).

As at January 1, 2010

Accounts receivable 501 Short-term borrowings 500 Accounts payable and accrued liabilities (1) Income and other taxes payable 1 Retained earnings 1 1 Ongoing impact: Accounts receivable securitization expenses of $8 million for the year ended December 31, 2010, are included in Financing costs under IFRS, rather than in Other expense under Canadian GAAP. –

TELUS 2010 annual report . 79 Effects of transition

Unaudited Unaudited pro forma effect pro forma effect on Owners’ equity on Net income (Section 8.2.2) (Section 8.2.3) Description and impacts As at Year ended Topic ($ millions – increase (decrease)) Jan. 1, 2010 Dec. 31, 2010

Leasing (sales and leaseback Difference from Canadian GAAP: The Company sold and leased-back certain transactions) non-strategic buildings, primarily in 2000 and 2001. IFRS requires that, where the original sale was at fair value, the gain be recognized in income immediately. Canadian GAAP required that gains arising on sales and leaseback transactions be deferred and amortized over the term of the resulting lease.

Transition date impact: A portion of gains deferred under Canadian GAAP will be recognized at the transition date as an increase in opening Retained earnings.

As at January 1, 2010

Accounts payable (6) Other long-term liabilities (31) Deferred income tax liability 7 Retained earnings 30 30

Ongoing impact: Amortization of deferred gains under IFRS will be reduced for the portion of gains recognized at the transition date under IFRS.

Year ended December 31, 2010

Goods and services purchased 12 Income taxes (3) Net income (9) (9) Asset retirement obligations IFRS 1 optional exemption taken: Yes. (Decommisioning liabilities Transition date impact: The Company has chosen to apply the relevant IFRS included in the cost of property, standard (IFRIC 1) prospectively effective the date of transition to IFRS due to its small plant and equipment) impact. Had the Company not taken the exemption, it would have been required to retrospectively calculate changes over the life of each obligation. A change in the discount rate used to record pre-existing asset retirement obligations at the transition date is as follows:

As at January 1, 2010

Property, plant and equipment 12 Non-current liabilities – provisions 21 Deferred income tax liability (2) Retained earnings (7) (7)

Difference from Canadian GAAP: IFRS requires that the pre-existing asset retirement obligation balance be re-valued every reporting period using the then current discount rates and the associated discount accretion is to be included as a component of Financing costs. Canadian GAAP did not adjust the pre-existing discounted asset retirement obligation balance for changes in discount rates, and the associated discount accretion was included in Operations expenses.

Ongoing impact: The result is a $4 million decrease in Operating expenses offset by a $4 million increase in Financing costs, as well as a $1 million increase in Depreciation expense for the year ended December 31, 2010. (1)

80 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

Effects of transition

Unaudited Unaudited pro forma effect pro forma effect on Owners’ equity on Net income (Section 8.2.2) (Section 8.2.3) Description and impacts As at Year ended Topic ($ millions – increase (decrease)) Jan. 1, 2010 Dec. 31, 2010

Provisions Difference from Canadian GAAP; transition date and ongoing impacts: IFRS requires that provisions be presented on the statement of financial position as a distinct line item. Canadian GAAP did not identify provisions as a specific subset of liabilities. At the transition date, as a result of further review and analysis, certain provisions were deter mined to be more long-term in nature, resulting in Current liabilities decreasing by $22 million and Non-current liabilities increasing by $22 million.

As at January 1, 2010

Accounts payable and accrued liabilities (42) Restructuring accounts payable and accrued liabilities (135) Advance billings and customer deposits (144) Provisions – Current liabilities 299 Other long-term liabilities (69) Provisions – Non-current liabilities 91 – Income taxes – deferred Difference from Canadian GAAP; transition date and ongoing impacts: IFRS requires that taxable and deductible temporary differences arising from current assets and current liabilities be classified, respectively, as non-current liabilities and non-current assets. Canadian GAAP classified taxable and deductible temporary differences arising from current assets and current liabilities, respectively, as the current portion of future income tax liabilities and assets, respectively. Deferred income taxes at the transition date also reflect tax impacts of various retrospective adjustments.

As at January 1, 2010

Other long-term assets (2) Income and other taxes payable (9) Current portion of deferred income taxes (294) Deferred income tax liability 296 Retained earnings 5 5

Income taxes Year ended December 31, 2010 Income taxes 1 Net income (1) (1) Cumulative translation IFRS 1 optional exemption taken: Yes. differences Transition date impact: The Company has chosen to deem cumulative translation differences for all foreign operations to be zero, resulting in a reclassification of cumulative foreign currency translation losses from Accumulated other comprehensive income to Retained earnings. Had the Company not taken the exemption, the standard would have been retroactively applied to the date each foreign subsidiary was acquired or formed.

As at January 1, 2010

Retained earnings (19) Accumulated other comprehensive income 19 – Total effects (220) 14

TELUS 2010 annual report . 81 Additional optional exemptions and policies with insignificant or no quantified impact

Topic Description

Business combinations IFRS 1 optional exemption taken: Yes.

As adopted by the Company, Canadian GAAP in respect of business combinations, consolidation and non-controlling interests was aligned with IFRS effective January 1, 2009. Business combinations prior to that date are measured differently. Fair value or revaluation IFRS 1 optional exemption taken: No. as deemed cost Transition date impact: The Company has chosen to measure its property, plant and equipment and intangible assets at historical cost.

Ongoing impact: For post-transition periods, IFRS allows the Company to choose whether to use the revaluation model or historical cost model. The Company has chosen to continue use of the historical cost model for each class of asset. Share-based payment IFRS 1 optional exemption taken: Yes. transactions Transition date impact: The Company has chosen to apply the relevant standard (IFRS 2) only to share option awards made subsequent to 2001 and to modification of outstanding share option awards subsequent to 2001 (which results in no difference from past application of Canadian GAAP). Borrowing costs IFRS 1 optional exemption taken: Yes.

Transition date impact: The Company has chosen to apply the relevant standard (IAS 23) prospectively effective the date of transition to IFRS due to its small impact.

International Financial Reporting Standards that are mandatory at exposure draft. The exposure draft also proposes certain recognition, the changeover date have been finalized, however, the IASB’s work measurement, presentation and disclosure changes. Amendments to plan currently has projects underway that are expected to result in the existing standards are currently expected to be finalized in mid-2011 new pronouncements that continue to evolve IFRS. The IASB is review- with an unknown effective date for the Company. ing the requirements of IAS 37 Provisions, Contingent Liabilities and In June 2010, the IASB issued an exposure draft pertaining to Contingent Assets, with the intention of replacing it with a new standard revenue recognition as part of the joint revenue project with the U.S. in 2011. The IASB is also expected to review the IAS 12 standard for Financial Accounting Standards Board (FASB). In August 2010, the income taxes and develop proposals for changes. The existing IAS 12 IASB issued an exposure draft pertaining to leases as part of the joint standard is applicable to TELUS’ transition. leasing project with FASB. The leasing exposure draft proposes the In April 2010, the IASB issued an exposure draft pertaining to elimination of the distinction between operating leases and finance leases employee benefits, specifically the recognition of actuarial gains or losses and would introduce a new model for lessees and lessors. for defined benefit plans. The exposure draft proposes to eliminate the The Company continues to evaluate the possible effects of new corridor method for recognition of actuarial gains or losses. The Company’s standards and exposure drafts, and will monitor the near-term projects elected accounting policy choice of recognizing ongoing actuarial that the IASB initiates for income taxes. The ultimate impacts cannot gains or losses in Other comprehensive income is consistent with this be determined at this time.

82 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

8.2.2 Quantified effects on the consolidated statements of financial position The following tables summarize by topic, the expected IFRS transition impacts on the Company’s consolidated statements of financial position subtotals and totals, as at January 1 and December 31, 2010.

Consolidated statement of financial position, subtotals and totals

Recognition, measurement, presentation and disclosure effects

Topics (see Section 8.2.1)

Employee benefits Leasing As (defined Sale of (sales and Asset Unaudited As at January 1, 2010 currently benefit Impairment accounts leaseback retirement Income pro forma ($ millions) reported plans) of assets receivable transactions) obligations Provisions taxes IFRS-IASB

Assets Current assets 1,127 – – 501 – – – – 1,628 Non-current assets 18,092 (1,314) 1,109 – – 12 – (2) 17,897 19,219 (1,314) 1,109 501 – 12 – (2) 19,525 Liabilities Current liabilities 2,964 – – 500 (6) – (22) (303) 3,133 Non-current liabilities 8,680 (237) 281 – (24) 19 22 296 9,037 11,644 (237) 281 500 (30) 19 – (7) 12,170 Owners’ equity Common Share and Non-Voting Share equity 7,554 (1,077) 828 1 30 (7) – 5 7,334 Non-controlling interests 21 – – – – – – – 21 7,575 (1,077) 828 1 30 (7) – 5 7,355 19,219 (1,314) 1,109 501 – 12 – (2) 19,525

Consolidated statement of financial position, subtotals and totals

Recognition, measurement, presentation and disclosure effects

Topics (see Section 8.2.1)

Employee benefits Leasing As (defined Sale of (sales and Asset Unaudited As at December 31, 2010 currently benefit Impairment accounts leaseback retirement Income pro forma ($ millions) reported plans) of assets receivable transactions) obligations Provisions taxes IFRS-IASB

Assets Current assets 1,390 – – 401 – – – 6 1,797 Non-current assets 18,209 (1,504) 1,104 – – 23 – (5) 17,827 19,599 (1,504) 1,104 401 – 23 – 1 19,624 Liabilities Current liabilities 3,949 – – 400 (7) – – (348) 3,994 Non-current liabilities 7,449 (242) 280 – (14) 31 – 345 7,849 11,398 (242) 280 400 (21) 31 – (3) 11,843 Owners’ equity Common Share and Non-Voting Share equity 8,179 (1,262) 824 1 21 (8) – 4 7,759 Non-controlling interests 22 – – – – – – – 22 8,201 (1,262) 824 1 21 (8) – 4 7,781 19,599 (1,504) 1,104 401 – 23 – 1 19,624

TELUS 2010 annual report . 83 8.2.3 Quantified effects on the consolidated statement of income and other comprehensive income The following table illustrates by topic how the transition to IFRS is expected to impact key line items on the consolidated statement of income and other comprehensive income for 2010.

Consolidated statement of income and other comprehensive income

Effects on key line items (Increase (decrease))

Recognition, measurement, presentation and disclosure effects Presentation effects (see topics in Section 8.2.1)

Employee benefits – Impairment Leasing Year ended December 31, 2010 As defined of assets Accounts (sales and Asset Unaudited ($ millions except currently Government Analysis of benefit (impairment receivable leaseback retirement pro forma per share amounts) reported Revenue(1) assistance(2) expenses(3) plans reversal) securitization transactions) obligations Other IFRS-IASB

Operating revenues 9,779 (9,779) – – – – – – – – – Services – 9,168 (37) – – – – – – – 9,131 Equipment – 611 – – – – – – – – 611 9,779 – (37) – – – – – – – 9,742 Other operating income – 2 48 – – – – – – – 50 9,779 2 11 – – – – – – – 9,792 Operating expenses Operations 6,062 – – (6,062) – – – – – – – Restructuring costs 74 – – (74) – – – – – – – Goods and services purchased – – – 4,228 – – – 12 (4) – 4,236 Employee benefits expense – – 11 1,934 (39) – – – – – 1,906 Depreciation 1,333 – – – – 5 – – 1 – 1,339 Amortization of intangible assets 402 – – – – – – – – – 402 7,871 – 11 26 (39) 5 – 12 (3) – 7,883 Operating income 1,908 2 – (26) 39 (5) – (12) 3 – 1,909 Other expense, net 32 2 – (26) – – (8) – – – – Financing costs 510 – – – – – 8 – 4 – 522 Income before income taxes 1,366 – – – 39 (5) – (12) (1) – 1,387 Income taxes 328 – – – 10 (1) – (3) – 1 335 Net income 1,038 – – – 29 (4) – (9) (1) (1) 1,052 Other comprehensive income(4) 54 – – – (214) – – – – – (160) Total comprehensive income 1,092 – – – (185) (4) – (9) (1) (1) 892 Net income attributable to Common Shares and Non-Voting Shares 1,034 – – – 29 (4) – (9) (1) (1) 1,048 Net income per Common Share and Non-Voting Share Basic 3.23 – – – 0.09 (0.01) – (0.03) – (0.01) 3.27 Diluted 3.22 – – – 0.09 (0.01) – (0.03) – – 3.27

(1) IFRS requires the disclosure of specific categories of revenue. Canadian GAAP did not provide the same specificity of revenue categorization. In addition, gains on sale of investments and real estate assets of $4 million, net of equity losses in non-affiliates of $2 million, are reclassified to Other operating income from Other expense, net, in accordance with the presentation requirements of IAS 18. (2) IFRS requires government assistance amounts to be categorized as Other operating income. Canadian GAAP did not define government assistance to include receipts such as the high-cost serving area portable subsidy. As well, Canadian GAAP allowed for government assistance to be netted against the associated expense as a cost recovery. (3) IFRS requires that expenses be presented using either a nature approach or a function approach; the Company has selected the nature approach. Canadian GAAP did not provide the same level of specificity of expense analysis. One effect is the reclassification of charitable and political donations from Other expense, net, to Goods and services purchased. (4) IFRS impact reflects actuarial gains and losses for employee defined benefit plans charged to Other comprehensive income, as an item that subsequently will never be reclassified to Net income.

84 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

The following summarizes the differences in 2010 by quarter for consolidated Operating revenues, Net income, Total comprehensive income and earnings per share.

Quarterly differences in key line items

($ millions except per share amounts) 2010 Q4 2010 Q3 2010 Q2 2010 Q1

Operating revenues As currently reported 2,551 2,455 2,398 2,375 IFRS-IASB (unaudited pro forma) 2,554 2,461 2,400 2,377 Increase under IFRS-IASB 3 6 2 2

Net income As currently reported 227 247 296 268 IFRS-IASB (unaudited pro forma) 226 251 302 273 Increase (decrease) under IFRS-IASB (1) 4 6 5

Total comprehensive income As currently reported 225 285 298 284 IFRS-IASB (unaudited pro forma) 27 489 93 283 Increase (decrease) under IFRS-IASB (198) 204 (205) (1)

Net income per Common Share and Non-Voting Share – basic As currently reported 0.70 0.77 0.92 0.84 IFRS-IASB (unaudited pro forma) 0.70 0.78 0.94 0.85 Increase under IFRS-IASB – 0.01 0.02 0.01

Net income per Common Share and Non-Voting Share – diluted As currently reported 0.70 0.76 0.92 0.84 IFRS-IASB (unaudited pro forma) 0.70 0.78 0.94 0.85 Increase under IFRS-IASB – 0.02 0.02 0.01

The difference in Total comprehensive income under IFRS reflects variability from actuarial gains and losses for employee defined benefit plans, recorded in Other comprehensive income as an item that subsequently will never be reclassified to Net income.

TELUS 2010 annual report . 85 8.2.4 Effects on other measures The Company does not expect the changeover to have a significant impact on its segmented operating indicators, or Consolidated statements of cash flows, policy metrics and other reported measures.

Measures Expectation or result Defined benefit plan expenses recognized in Net income Will be reduced, as shown in the previous section, and will experience lower volatility after changeover, as actuarial gains and losses will be charged to Other comprehensive income. EBITDA EBITDA is a non-GAAP measure that after For the year ended December 31, 2010, unaudited pro forma changeover to IFRS is equivalent to Operating EBITDA is $3,650 million, as compared to $3,643 million income before Depreciation and Amortization currently measured and reported. See Section 11.1 for additional expenses information on the transition differences in the measurement of 2010 EBITDA. Segmented Subscriber measures Unaffected Revenue and EBITDA Not materially affected Wireless measures currently reported such as No significant impacts expected ARPU, COA per gross subscriber addition and Retention spend as a percentage of network revenue Consolidated statements of cash flows Presentation differences only Policy measures Net debt to EBITDA – excluding restructuring Policy of 1.5 to 2.0 times – unchanged. costs Historical measure immaterially affected (see table below). Dividend payout ratios Policy of 55 to 65% of sustainable net earnings on a prospective basis – unchanged.

Historical measures based on reported and adjusted earnings – not materially affected (see table below). Other measures Earnings coverage Not materially affected (see table below).

EBITDA – excluding restructuring costs interest coverage

Free cash flow

Net debt to total capitalization

The Company’s policy for Net debt to EBITDA – excluding restructuring costs continues to be in the range of 1.5 to 2.0 times, and the policy for dividend payout ratio of sustainable net earnings on a prospective basis continues to be 55% to 65%.

Liquidity and capital resource measures

Unaudited pro forma As currently IFRS-IASB reported As at, or years ended, December 31 2010 2010 Differences

Debt ratios(1) Net debt to total capitalization (%) 46.2 45.5 0.7 pts. Net debt to EBITDA – excluding restructuring costs 1.8 1.8 –

Coverage ratios(1) Earnings coverage 3.6 3.8 (0.2) EBITDA – excluding restructuring costs interest coverage 7.1 7.3 (0.2)

Other measures Free cash flow ($ millions)(2) 940 947 (7) Dividend payout ratio(1) of adjusted net earnings (%) 64 65 (1) pt. Dividend payout ratio(1) (%) 64 65 (1) pt.

(1) See Section 11.4 Definition and calculation of liquidity and capital resource measures. (2) See Section 11.2 Free cash flow for the definition and calculation.

86 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 8

8.2.5 Changeover status

Key activity Milestones (expected timeframes) Status and comments Financial statement preparation . Key elements phase Identify, evaluate and select accounting policies Initial choices completed and approved in 2009. necessary for the Company to change over to IFRS Ongoing review of IFRS exposure drafts has This phase includes other operational elements, not resulted in any changes to policy choices. such as information technology, internal control See commentary below over financial reporting, and training . Embedding phase Integrate the solutions necessary for the changeover The Company has adapted its existing accounting into the Company’s underlying financial systems systems for parallel reporting under IFRS and processes (see Infrastructure below) Maintain two parallel sets of books: one according The Company maintained two parallel sets of books to contemporary Canadian GAAP and one in 2010, as planned according to contemporary IFRS Develop financial statements formats Approval in principle received, with finalization and note disclosures expected for first quarter 2011 reporting Disclose the impacts on 2010 in the MD&A Disclosed quantified impacts starting with the when available third quarter 2010 MD&A. See quantified impacts in this MD&A in: . Section 8.2.2 for unaudited effects on the Consolidated statements of financial position at the transition date and at December 31, 2010 . Section 8.2.3 for unaudited effects on the Consolidated statements of income and other comprehensive income for the year ended December 31, 2010 . Section 8.2.4 for policy metrics and other calculated measures. Communication and training Provide ongoing training on expected IFRS impacts, In 2008, externally sponsored seminars for IFRS 1 elections and accounting policy choices Finance managers were held in several locations across Canada.

In 2009 and 2010, the Company leveraged internal resources to implement general Finance-wide training seminars and a number of targeted training seminars for Finance team members who are most affected by the IFRS convergence project.

General communication and education is provided to all Finance team members highlighting external IFRS resources available through TELUS’ internal IFRS website. Infrastructure – Determine necessary changes to systems and Parallel reporting platforms were designed, Information technology processes and update accounting systems to enable implemented and tested for operation in the fourth the opening financial position under IFRS, and quarter of 2009. facilitate dual reporting in 2010 Dual reporting capability in the Company’s accounting systems was activated in the first quarter of 2010. Implement financial planning and forecasting Dual forecasting capability was implemented in capability under IFRS standards the second half of 2010 Business policy assessment Assess impacts on contractual arrangements and Contract reviews were conducted each quarter and covenants. Implement changes as necessary changes have not been required.

Calculations of the Leverage Ratio and Coverage Ratio, specified in the Company’s 2012 credit facility, are not affected by the IFRS changeover.

Management’s decision-making processes are not significantly affected by the transition to IFRS. Policy measures and other key measures for TELUS, as well as segmented results and operating indicators, are not significantly impacted (see Section 8.2.4).

TELUS 2010 annual report . 87 Key activity Milestones (expected timeframes) Status and comments Control environment . Internal control over financial Approval of initial IFRS 1 optional exemption Senior management approval received for initial reporting and accounting policy choices elections and policy choices obtained in 2009.

Audit Committee review of management’s initial elections and policy choices, and Board of Directors’ approval obtained in 2009. Progress reviews by senior management Review by senior management of implementation and Audit Committee progress, impacts of outstanding IFRS exposure drafts, and quantification efforts in April, July and October 2010, and January 2011.

Progress presented at Audit Committee meetings in May, August and November 2010, and in February 2011. Quantified results were reviewed with the Audit Committee in July 2010. Testing of controls for 2010 comparatives Activities commenced in the first quarter of 2010 and continued during the year . Disclosure controls and procedures Review and sign-off conversion effects Approval of IFRS disclosures in third quarter on fiscal 2010 MD&A, including quantification of impacts on key . Review and approval by senior management line items, received in October 2010. . Review by Audit Committee and approval First quarter of 2011: by the Board of Directors . Approval of fiscal 2010 IFRS disclosures in annual MD&A . Senior management approval of supplementary IFRS disclosures. December 2010 The Company continued its long-standing practice . Board of Directors’ approval of the Company’s of releasing annual targets and key assumptions 2011 IFRS-based budget for the upcoming year in December and providing . Senior management approval of 2011 public final guidance for the current year. annual targets under IFRS IFRS targets for 2011 and final Canadian GAAP . Publicly issue final guidance for fiscal 2010 guidance for 2010 were released on December 14, according to Canadian GAAP together with 2010, followed by an investor call and webcast. 2011 annual targets according to IFRS.

GENERAL OUTLOOK 9 Expectations for the telecommunications industry in 2011

The discussion in this section is qualified in its entirety by the Caution Revenues in the Canadian telecom industry grew by an estimated regarding forward-looking statements at the beginning of the MD&A. 2% in 2010, to approximately $42 billion, with wireless and data services continuing to act as growth engines for the sector. Offsetting this growth Outlook for the telecommunications industry was continued wireline industry weakness in traditional voice service in 2011 revenue, as well as declining long distance revenues. Bell Canada and its During 2010, Canada’s economy showed signs of improvement, with affiliated companies represented about 43% of the total industry revenue. economic growth continuing through the fourth quarter of 2010 after As the second largest telecommunications provider in Canada, emerging from a recession in the third quarter of 2009. The Bank of TELUS generated $9.8 billion in revenues in 2010, or approximately 23% Canada reported in its January 2011 Monetary Report that it expects of the total industry revenue. TELUS’ revenue growth resumed in 2010, Canada’s economic growth to be 2.4% in 2011 and 2.8% in 2012. increasing by 1.8%, with wireless revenues and wireline data revenue Western Canadian provinces are projected to grow at the fastest rates, representing approximately 74% of total revenues (71% in 2009). due to strong global demand for commodities. The Company has targeted consolidated revenue growth between 1 and 4% in 2011.

88 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 9

Wireless It is also expected that major mobile platforms will ramp up efforts The Canadian wireless industry experienced increased growth in to sell streaming content services in 2011 such as music, TV and video 2010 with estimated year-over-year revenue and EBITDA increasing by as consumers become more comfortable with cloud-based computing, approximately 5% and 3%, respectively (3.2% and 3.1% in 2009). a web-based way to cost-effectively process, manage and store data. The Canadian wireless market continues to grow at a reasonable It is expected that major mobile platforms will make the transition to pace with an estimate of more than 1.7 million new subscribers in 2010, supporting cloud-based services to allow customers to access both or an approximate 4.4 percentage point increase in penetration to corporate and personal data (i.e. photos, streaming video, music) approximately 73% of the population (in 2009, 1.4 million new subscribers from virtually anywhere and on any device. for an approximate 3.6 percentage point increase in penetration). The The demand for wireless data services has been growing strongly wireless penetration rate in Canada is expected to further increase in and it is projected that this demand will further accelerate. This growth is 2011 by approximately 4.5 to five percentage points. At 73% penetration, driven by increasing levels of broadband penetration, ongoing investment the wireless market in Canada continues to present a meaningful in new network technologies such as HSPA+ and dual-cell that provide growth opportunity and is most comparable to the U.S., which has faster data speeds and allow for a richer user experience and applications a penetration rate of approximately 97%. of greater utility, increasing need for personal connectivity and network- Wireless penetration rates in many Western European countries have ing, increasing affordability and selection of smartphones and Internet-only approached and even surpassed 100%. These rates are not exactly devices including mobile Internet keys and emerging products such comparable to Canada for several reasons, including: Canada’s wireline as tablets and e-book readers, increasingly rich multimedia services and local service rates are among the lowest of Organization for Economic applications, increasing wireless competition, and more affordable data Co-operation and Development (OECD) countries, priced as flat-rate plans. The increasing levels of data traffic represent a growing challenge monthly charges that include all local calls to wireless phones; Europe to wireless carriers’ networks and their ability to serve this traffic. has a calling party pays regime for wireline local calls; the dominance To better manage anticipated increases in wireless data traffic and of global system for mobile communication (GSM) networks in Europe to capitalize on Canada’s wireless growth opportunity, Canadian wireless allows for multiple subscriptions on a single handset that are used to providers continue to roll out faster, next generation high-speed wireless arbitrage roaming charges and inflate subscription numbers; and a much networks, increasing network capacity. TELUS and Bell successfully lower population density in Canada affects the economic efficiency and launched an extensive next generation network based on HSPA+ tech- speed of providing coverage to 99% of the population (i.e. 34 million nology in 2009, which delivers manufacturer-rated data download speeds people within nine million square kilometres in Canada compared to of up to 21 Mbps and now covers approximately 97% of Canada’s 730 million people within 10 million square kilometres in Europe). These population. TELUS continued to enhance this HSPA+ network into 2011 factors, historically, have reduced the demand for wireless substitution with the planned commercial launch of HSPA+ dual-cell technology, in Canada as compared to Europe. which offers manufacturer-rated data speeds of up to 42 Mbps. The A key driver of wireless revenue growth continues to be the increased HSPA+ network positions the Company to meet data capacity demands adoption and usage of data services such as email, text, picture, video in the foreseeable future. This complements TELUS’ two other wire- and instant messaging, social networking, web browsing, application less networks and technologies – code division multiple access (CDMA) usage, gaming and video-streaming. In 2010, wireless data in Canada and Mike (iDEN), which provide customers access to a nationwide represented an estimated 25% of industry ARPU. This compares to high-speed EVDO service and the industry-leading Push to Talk Mike approximately 46% in Asia-Pacific, 27% in Europe and 34% in the U.S., service, respectively. suggesting a significant ongoing growth opportunity in Canada. The In addition to the superior capabilities and higher capacity delivered higher data proportion in Asia is due in part to a very low rate of penetra- by HSPA+, this wireless infrastructure supports the company’s migration tion of wired Internet to households in many Asian countries. The higher to long-term evolution (LTE), which is emerging as the global standard. data proportion in Europe is partly a result of the popularity of short LTE technologies are expected to deliver data speeds of up to 100 Mbps, messaging service (SMS) and the earlier wide availability of 3G+ facilitated while at the same time introducing significant improvements in network by greater urban density. The higher proportion of data usage in the U.S. capacity and performance. The ecosystem for LTE devices is expected to is due in part to the introduction of the iPhone in that market by Apple evolve in 2011 with Verizon Wireless launching an LTE wireless network and AT&T two years earlier. in 38 cities in December 2010, covering more than 110 million people This data growth is being facilitated by the increasing availability and in the United States. Verizon expects to expand this coverage by rolling popularity of iPhone, BlackBerry and Android smartphones, as well as out LTE over its existing network footprint by 2013. In early 2011, AT&T increased adoption of mobile Internet keys. The increasing adoption of announced plans to accelerate and launch its LTE network by mid-2011, a wider range of smartphones, which are more expensive than traditional with the network to be largely complete by year-end 2013. However, wide wireless phones, is impacting industry margins. With a multi-year sales availability of compatible devices usually lags by one to two years. agreement, there is usually a large upfront device subsidy provided by To support technology evolution and increasing demand for capacity, wireless carriers with initial negative returns but with higher ARPU and TELUS will focus on increasing its spectrum position. The ability to acquire lower churn rates resulting in higher average lifetime revenue. Tablet additional spectrum to address future requirements is dependent on the devices that operate on mobile networks or on Wi-Fi are expected to timing and the rules established by Industry Canada. Industry Canada be an accelerating growth segment in 2011, as customers are expected initiated a consultation on the 700 MHz band with an auction likely in late to buy more new computing devices that are not traditional personal 2011 or 2012. There is no guarantee that the Canadian government computers. Customers increasingly want to remain connected to the will not reserve spectrum for new entrants or adopt some open access Internet and experience an enhanced portable computing experience. provisions for some of this spectrum, as was done in the U.S.

TELUS 2010 annual report . 89 The level of competitive intensity in the wireless market continued In addition, cable-TV companies continue to increase the speed in 2010 and is expected to continue to increase in 2011. The advanced of their Internet offerings, intensifying customer acquisition offers. wireless services (AWS) spectrum auction in 2008 resulted in eight new Canada’s four major cable-TV companies have almost 5.4 million Internet potential competitors acquiring spectrum in separate and overlapping subscribers, up from approximately 5.1 million one year earlier, while regions, collectively covering most markets in Canada. In 2010, four new telecom companies have 4.3 million subscribers, up from approximately entrants launched or expanded wireless services using portions of their 4.2 million one year earlier. Although the high-speed Internet market is AWS spectrum coverage, including WIND Mobile, Mobilicity, Public maturing with 75% penetration in TELUS’ incumbent region in Western Mobile and Quebec-based cable-TV company Videotron. Western-based Canada and 73% penetration across Canada, subscriber growth is cable-TV company Shaw has delayed its wireless launch to early 2012 expected to continue over the next several years. after indicating previously that it would launch in late 2011. The growing popularity of TV anywhere is expected to continue New entrants, with the exception of Videotron in the province of as customers demand the ability to view content on multiple screens Quebec, are not expected to build networks in remote or rural areas for including on computers, smartphones and tablets, as well as on some time, choosing to focus on urban markets and provide extended TVs. In addition, over-the-top content providers like Netflix for movies coverage for their urban subscribers through roaming agreements. To win and Hulu for TV shows and movies, as well as Apple and Google, are market share, strategies of entrants have included aggressive price dis- anticipated to compete for share of viewership but could complement counting, unlimited rate plans, no system access fees and adding points traditional carrier TV services. of distribution. However, these new entrants must also manage various To help alleviate the competitive challenges in the traditional wireline challenges including significant capital requirements for network build-out segment, TELUS’ Future Friendly Home® strategy continues to position and upgrades, future spectrum costs, upfront costs associated with the Company to grow wallet share with consumers, while enhancing launching and distributing new brands and services, and raising invest- retention and loyalty through multiple service offerings. In June 2010, the ment capital. Company launched new TELUS brands Optik TV (IP TV based on the In addition, TELUS, Rogers and Bell have separately branded basic Microsoft Mediaroom platform) and Optik High Speed Internet in urban value services or discount offerings to better position themselves in this Alberta and British Columbia markets. TELUS now offers an enhanced expanding segment. In the summer of 2010, Rogers and Bell became TV experience with differentiated services such as PVR Anywhere, which more aggressive, re-launching or introducing new wireless unlimited zone gives customers the ability to record and play back shows on up to six brands at lower price points. Late in the year, TELUS also lowered prices TVs in the home, and Remote Recording, which allows customers to in the value segment of the market through its Koodo service. use their smartphone, tablet or Internet-connected computer to schedule Building on the success of Clear & Simple rate plans that TELUS their PVR recordings when away from home. TELUS Satellite TV in launched in November 2009, which removed system access and carrier Alberta and B.C. complements the company’s Optik TV service, enabling 911 fees, the Company introduced a variety of initiatives in 2010 aimed TELUS to more effectively serve households that are not currently on at bringing greater transparency and simplicity to customers. This the Optik TV network footprint, and leverages TELUS’ strong distribution included data usage notifications, the Clear and Simple Device Upgrade and mass marketing capabilities. This expands the addressable market program to help customers obtain a new handset earlier through a for TELUS TV to more than 90% of households in the two provinces. recovery of the subsidy remaining on their existing device, and a more TELUS’ primary western cable-TV competitor announced plans to launch transparent cancellation policy. a new residential media hub/gateway in 2011 to compete with TELUS’ Given TELUS’ high and increasing exposure to wireless (52% and Optik TV, and may offer some similar features such as whole home PVR. 58%, respectively, for 2011 targeted consolidated revenue and EBITDA), These new IP-based services are supported by TELUS’ wireline strong established brands and consistent focus on leading-edge, value- broadband network, which has been upgraded throughout 2009 and added products, profitable subscriber growth and evolving technologies, 2010 to meet the evolving bandwidth needs of customers. In 2010, TELUS is positioned to benefit from ongoing growth in the Canadian TELUS expanded its broadband network in communities in Alberta and wireless market. B.C., to cover 87% of the top 48 communities with ADSL2+, which allows broadband download speeds of up to 15 Mbps or more. In addi- Wireline tion, the Company has also been rolling out a VDSL2 technology overlay In contrast to wireless, expectations for the mature wireline segment to reach a comparable footprint in the top 48 communities by the end continue to be modest. The wireline telecom landscape is expected of 2011 with download speeds of up to 30 Mbps. to remain very competitive in 2011 as traditional services, such as local Combined with wireline local and long distance, wireless and high- and long distance telephony, are expected to continue declining due speed Internet and entertainment services, TELUS is increasingly offering to consumer migration to wireless and voice over IP (VoIP) services. bundled products to achieve competitive differentiation with an integrated Canada’s four major cable-TV companies had almost 3.7 million tele- set of services that provides customers more freedom, flexibility and phony subscribers at the end of 2010, up by just under 500,000 from choice. At the same time, cable-TV companies have shown a greater one year earlier, which is an estimated 31% consumer market share ability to increase pricing as evidenced by the consumer price index nationally. In addition, other non-facilities-based competitors also offer (CPI) of cable and satellite services (including pay TV) increasing at an local and long distance VoIP services and resell high-speed Internet average annual rate of 4.4% from 2001 to 2009 (and higher at Shaw solutions. This competition impacts the erosion of TELUS’ residential Communications in the West). Over the same periods, the CPIs for com- network access lines and associated local and long distance revenues. munications and telephone services increased at an average annual rate TELUS’ total line losses of 227,000 or 5.7% in 2010 compares favour- of 1.2 to 1.3%, which is lower than the general CPI of 2.0%. Cable-TV ably to North American peers, partly due to enhanced retention and companies are also continuing to roll out higher-speed Internet services, loyalty through multiple service offerings. Internet telephony and digital cable-TV services to fuel their growth.

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Vertical integration of the Canadian broadcasting industry has efficiencies to compensate, in part, for margin pressures related to the been a growing trend in 2010 with Shaw acquiring television assets of migration from legacy to IP-based services. At the same time, this opens Canwest at the end of 2010 and BCE’s proposed acquisition of CTV. new opportunities for integrated solutions that have greater business The CRTC has scheduled a public policy hearing in June 2011 on the impact than traditional telecom services. TELUS is offering a series effects of consolidation and vertical integration in the Canadian broad- of solutions targeting specific high-value segments as well as small and casting industry. TELUS is encouraged that the CRTC has recognized medium businesses (SMB). the importance of competition in the carrier market, and is seeking The SMB market, often viewed as underserved because it looks for to implement appropriate safeguards against self-dealing and anti- big-business solutions at close to small-business price points, is forecast competitive behaviour with respect to content. TELUS’ differentiated to be one of the fastest-growing markets in Canada. TELUS is investing approach, which is consistent with the Company’s content strategy, in a range of affordable solutions for this segment, including everything is to aggregate, integrate and make accessible the best content and from email to web applications. In the small business market, TELUS applications to customers, through whichever device they choose. TELUS has countered increased cable-TV competition by offering an integrated believes that it is not necessary to own content to make it accessible small business bundle called TELUS Business One, which includes con- on an economically attractive basis. nectivity (voice, Internet and email services), security, hosting, audio and In the business market, the convergence of IT and telecom, facili- video conferencing, and other IP-based tools. tated by the ubiquity of IP, continues to shape competitive investments. In conclusion, TELUS continues to believe its consistent strategic Telecoms are providing network-centric managed applications, while focus on providing a full suite of valuable and reliable communications IT service providers are bundling network connectivity with their software services; delivering differentiated, premium national business solutions in as service offerings. In addition, manufacturers continue to bring all-IP data and IP; exposure to growth services such as wireless, data and IP and converged (IP plus legacy) equipment to market, enabling a steady including high-speed Internet and TELUS TV; and the continued enhance- migration to IP-based solutions. The development of IP-based platforms ment of national wireless and broadband networks, solidly position the providing combined IP voice, data and video solutions creates cost Company for growth in the years ahead.

RISKS AND RISK MANAGEMENT Risks and uncertainties facing TELUS and how the Company 10 manages these risks

The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.

TELUS’ risk and control assessment process TELUS uses a three-level enterprise risk and control assessment LEVEL TWO: process that solicits and incorporates the expertise and insight of team Quarterly members from all areas of the Company. TELUS implemented this risk assessment process in 2002 and tracks multi-year trends for various key risks and control environment perceptions across the organization.

TELUS’ definition of business risk TELUS defines business risk as the degree of exposure associated with LEVEL ONE: TELUS Board LEVEL THREE: Annual risk and Executive Granular the achievement of key strategic, financial, organizational and process and control Leadership risk assessment Te am assessment objectives in relation to the effectiveness and efficiency of operations, reliability of financial reporting, compliance with laws and regulations and safeguarding of assets within an ethical organizational culture. TELUS’ enterprise risks are largely derived from the Company’s business environment and are fundamentally linked to TELUS’ strategies and business objectives. TELUS strives to proactively mitigate its risk exposures through rigorous performance planning and effective and efficient business operational management. Residual exposure for certain TELUS strives to avoid taking on undue risk exposures whenever risks is mitigated through appropriate insurance coverage, including for possible and ensure alignment with business strategies, objectives, values domestic and international operations, where this is judged to be efficient and risk tolerances. and commercially viable.

TELUS 2010 annual report . 91 Enterprise risk and control assessment process Level one Annual risk and control assessment Key inputs into this process include interviews with senior managers, data and updates from TELUS’ ongoing strategic planning process, and the results of an annual web-enabled risk and control assessment survey. The survey is based on the COSO (Committee of Sponsoring Organizations of the Treadway Commission) enterprise risk management and internal control frameworks. The survey is widely distributed to TELUS’ management leadership team (all executive vice-president, vice-president and director level team members and a random sample of management). Survey responses were received from 1,683 individuals in 2010.

Commencing in 2010, the TELUS Board of Directors were also surveyed to solicit their perspective of the Company’s key risks and approach to enterprise risk management, and to gauge the Company’s risk appetite and tolerance by key risk category.

TELUS’ assessment process incorporates input from recent internal and external audits, results of various risk management activities, and management’s SOX 404 (Sarbanes Oxley Act of 2002) internal control over financial reporting compliance activities. Key enterprise risks are identified, defined and prioritized, and classified into one of eight risk categories. Perceived risk resiliency (or readiness) is assessed by key risk and risk tolerance/appetite is evaluated by risk category.

Results of the annual risk and control assessment are shared with senior management and the Board (including the Audit Committee). Executive-level risk owners are assigned. In addition, the Board undertook a comprehensive review of its oversight responsibilities over key risks in 2010, which resulted in changes to the Board and Board committee mandates to emphasize and enhance their oversight responsibilities.

The annual risk assessment results guide the development of the Company’s annual internal audit program, which has an emphasis on assurance coverage of higher-rated risks and is approved by the Audit Committee. Risk assessments are also incorporated back into the Company’s strategic planning, operational risk management and performance management processes, and are shared with the Board. Level two Quarterly risk assessment review TELUS conducts a quarterly risk assessment review with key internal stakeholders across all business units to capture and communicate the dynamically changing business risks, identify key risk mitigation activities and provide quarterly updates and assurance to the Audit Committee. Level three Granular risk assessments TELUS conducts granular risk assessments for specific audit engagements and various risk management, strategic and operational initiatives (e.g. project, environmental management, safety, business continuity planning, network and IT vulnerability, and fraud and ethics risk assessments). The results of the multiple risk assessments are evaluated, prioritized, updated and integrated into the key risk profile throughout the year.

The following sections summarize the principal risks and uncertainties that could affect TELUS’ future business results going forward, and TELUS’ associated risk mitigation activities. The significance of these risks is such that they alone or in combination may have material impacts on TELUS’ business operations, reputation, results and valuation.

10 .1 Competition 10.5 Process risks 10.9 Litigation and legal matters 10.2 Technology 10.6 Financing and debt requirements 10.10 Human-caused and natural threats 10.3 Regulatory 10.7 Tax matters 10 .11 Economic growth and fluctuations 10.4 Human resources 10.8 Health, safety and environment

10.1 Competition cannibalizing TV and entertainment services. However, TELUS views over-the-top services as a possible Optik TV service offering. Overall, Competitor pricing and technological substitution may industry pricing pressure and customer acquisition efforts have intensified adversely affect market shares, volumes and pricing, across most product and service categories and market segments, leading to reduced utilization and increased commoditization and this is expected to continue. of traditional wired voice local and long distance services Risk mitigation, general: Canadian Radio-television and Telecom- TELUS faces intense competition across all key business lines and munications Commission (CRTC) decisions in recent years approving market segments, including consumers, small and medium businesses wireline deregulation have provided TELUS with improved flexibility (SMB) and the large enterprise market. to respond to intensifying competition. (See Section 10.3 Regulatory.) Technological advances have blurred the traditional boundaries Active monitoring of competitive developments in product and geo- between broadcasting, Internet and telecommunications. (See Section 10.2 graphic markets enables TELUS to respond more rapidly to competitor Technology.) Cable-TV companies continue to expand offerings of digital offers and leverage the Company’s full suite of integrated solutions voice and enhanced phone services, resulting in intensified competition and national reach. As discussed further below, to offset increasing in the residential and certain SMB, local access, long distance and high- competitive intensity and losses in traditional services provided in speed Internet access (HSIA) markets. Over-the-top content providers its incumbent areas, TELUS continues to invest in increasing the speed like Netflix are anticipated to compete for share of viewership, potentially and reach of its broadband networks, introduce innovative products

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and services, and enhance services with integrated bundle offers. extend the Company’s footprint in healthcare, benefit from the investments TELUS continues to expand into and generate growth in non-incumbent being made by governments in eHealth, bring to market services targeted markets in Central Canada with business services and mobility offerings. at consumers such as personal health records and tools to manage TELUS also continues to actively pursue a competitive cost structure. their health, pursue the transformation of the Canadian pharmacy benefit management sector and cross-sell more traditional telecom products Customer experience and services to the healthcare sector. TELUS is also focused on imple- There is a risk that TELUS will not maintain or increase levels of client menting large enterprise deals that leverage the Company’s capital loyalty if the products, services and service experience offered by the investments and capabilities. Company do not meet or exceed customer expectations. If TELUS does Wireline voice and data – Consumer not provide a better customer experience than its competitors, the TELUS In the consumer wireline market, cable-TV companies and other brand image could suffer, and business clients and consumers may competitors encounter minimal regulation and continue to combine a change service providers. The Company’s profitability could be negatively mix of residential local VoIP, long distance, HSIA and, in some cases, impacted should the costs to acquire and retain customers increase. wireless services into one bundled and/or discounted monthly rate, Risk mitigation: Enhancing customer experience and earning the along with their traditional broadcast or satellite-based TV services. loyalty of clients is a prioritized Company-wide commitment, which was In addition, cable-TV companies continue to increase the speed of their accelerated in a major organization-wide initiative that commenced in HSIA offerings. To a lesser extent, other non-facilities-based competi- 2010 and continues into 2011. Delivering on TELUS’ future friendly brand tors offer local and long distance VoIP services over the Internet and promise to clients continues as one of the Company’s key corporate resell HSIA solutions. Erosion of TELUS’ residential network access lines priorities in 2011. (See Section 3.) (NALs) is expected to continue from this competition, as well as ongoing technological and wireless substitution. Competitors are anticipated Wireline voice and data to capture a majority of the share in growth marketplace opportunities; Competition is expected to remain intense from traditional telephony, data, therefore, access line associated revenues, including long distance, IP and IT service providers, as well as from voice over Internet protocol can be expected to continue to decline. Although the HSIA market is (VoIP) focused entrants in both business and consumer markets. maturing, subscriber growth is expected to continue over the next several The industry transition from legacy voice infrastructure to IP telephony, years. With a more mature HSIA market, and the potential for higher- and from legacy data platforms to Ethernet, IP virtual private networks speed Internet offerings from competitors, TELUS may be constrained (VPN), multi-protocol label switching (MPLS) IP platforms and IP-based in its ability to maintain market share in its incumbent territories, service delivery models, continues at a robust pace. Legacy data revenues because of the amount and timing of capital expenditures associated and margins continue to decline. This decline has been only partially with maintaining competitive network access speeds. offset by increased demand and/or migration of customers to IP-based Risk mitigation in the consumer wireline market: TELUS continues platforms. IP-based solutions are also subject to downward pricing to expand the coverage and increase the speed of its high-speed pressure, lower margins and technological evolution. Capital investments Internet service and increase the coverage and capability of its IP-based in wireline infrastructure are required to facilitate this ongoing transition Optik TV service in its incumbent territories (see Broadcasting below process for all traditional incumbent local exchange carrier (ILEC) entities and Section 2.2 Strategic imperatives). The provision of Optik TV service including TELUS. helps the Company attract pull-through Internet subscriptions and Wireline voice and data – Business generally counter cable-TV competition in its incumbent markets, and to In the business market, price-discounted bundling of local access, retain and grow revenues with a bundled offering of local and long dis- wireless and advanced data and IP services has evolved to include tance telephony, HSIA and TV entertainment services. TELUS Satellite TV web-based and e-commerce services, as well as other IT services and service in Alberta and B.C. complements IP TV service, enabling the support. Non-traditional competitors such as Microsoft have entered Company to more effectively serve those households that are not currently the telecom space through new products like Unified Communications, on the TELUS IP TV network footprint and leverage TELUS’ strong which provides the ability to redirect and deliver, in real time, email, distribution and marketing presence. TELUS Satellite TV service is made voice and text messages from a variety of telecom and IT systems to possible by an agreement with Bell Canada. the device nearest to the intended recipient. With this broader bundling of traditional telecom services with IT services, TELUS increasingly Broadcasting faces competition from pure Internet and information technology hardware, As noted above, the Company offers TELUS TV in B.C., Alberta and software and business process/consulting related companies. Cable-TV Eastern Quebec, and continues targeted roll-outs of Optik TV to new companies target the SMB market with their VoIP services. The result areas. While TELUS TV provides numerous interactivity and custom- is that traditional and non-traditional competitors are now focused on ization advantages, there can be no assurance that TELUS TV will be providing a broad range of telecommunications services to the business successful in achieving its plans of obtaining a sizable share of the market, particularly in the major urban areas. TV services market or that implementation costs or projected revenues Risk mitigation in the business wireline market: TELUS continues for TELUS’ television service will be as planned. to increase its capabilities through a combination of strategic acquisitions Risk mitigation: Fully digital TELUS TV is offered as both an IP-based and partnerships, a focus on priority vertical markets (public sector, service (in urban markets of B.C., Alberta and Eastern Quebec) and healthcare, financial services, energy, and telecom wholesale), expansion as a satellite-based service (in B.C. and Alberta). TELUS broadened the of strategic solution sets in the enterprise market, and a mass modular addressable market for its HD TV services through the deployment of approach in the SMB market (including services such as TELUS Business ADSL2+ technology and the Company continues to upgrade to VDSL2 One). Since the launch of TELUS Health Solutions in 2008, TELUS now technology. In February 2010, TELUS launched an upgrade of its IP TV leverages systems, its proprietary solutions and its reach and brand to middleware to next generation Microsoft Mediaroom. These developments

TELUS 2010 annual report . 93 enabled the Company’s June 2010 launch of the Optik brand, featuring the use of licensed and/or unlicensed spectrum to deliver higher-speed a suite of advanced TV and high-speed Internet services (see Section 2.2 data services. In addition satellite operators such as Barrett Xplore have Strategic imperatives), and drove an 85% expansion in TELUS’ TV announced that they are augmenting their existing HSIA capabilities subscriber base in 2010. with the launch of high-throughput satellites, targeting households in rural and remote locations claiming to offer speeds of up to 10 Mbps. Increasing vertical integration by competitors into broadcast Risk mitigation in wireless markets: The Company improved its content ownership competitive position with the launch of its HSPA+ wireless network in While TELUS is not currently seeking to be a broadcast content owner, November 2009. The network offers manufacturer-rated data down- several competitors have acquired broadcast content assets. This load speeds of up to 21 Mbps and covers approximately 97% of includes Shaw Communications’ 2010 acquisition of Canwest Global Canada’s population, including network sharing agreements with Bell and BCE’s pending acquisition of the programming services of Canada and SaskTel. In 2010 and 2011, the Company is deploying CTVglobemedia, while Rogers Communications and Quebecor already HSPA+ dual-cell technology, which is expected to increase manufacturer- own content assets. There is a risk that vertical integration could result rated maximum data download speeds to up to 42 Mbps when in content being withheld from TELUS, or being made available at commercialized. inflated prices. HSPA+ technology enables TELUS to provide an expanded selection Risk mitigation: TELUS’ strategy is to aggregate, integrate and of mobile devices and capability to roam in more than 200 countries. make accessible content and applications for customers’ enjoyment. Prior to November 2009, Rogers Communications Inc., as the only The Company does not believe it is necessary to own content to global system for mobile communication (GSM) and HSPA competitor make it accessible to customers on an economically attractive basis in Canada, enjoyed advantages in handset selection, earlier availability and it is not clear that any positive synergies of ownership for carriers of certain devices, lower handset costs and access to international outweigh negative synergies of limiting audiences through exclusive in-roaming revenue. arrangements and impacts on other supplier relationships. This inherent The Company introduced a variety of initiatives in 2010 to bring conflict may limit preferential self-dealing by vertically integrated competi- greater transparency and simplicity to customers, such as data notifica- tors, however, TELUS believes that regulatory safeguards are necessary. tions, the new Clear and Simple Device Upgrade program, and a more The CRTC has initiated a proceeding to discuss issues related to vertical transparent cancellation policy for those who have activated or renewed integration. (See Section 10.3 Regulatory – Broadcasting distribution their contract after November 20, 2010. (See Section 2.2 Strategic undertakings and Risk mitigation for regulatory matters.) imperatives – Providing integrated solutions that differentiate TELUS from its competitors.) In addition, to compete more effectively in serving a Wireless markets variety of customer segments, TELUS also offers a basic service brand Wireless competitive intensity is expected to increase called Koodo Mobile first launched in March 2008. The AWS spectrum auction in 2008 resulted in eight new potential TELUS intends to continue the marketing and distribution of innovative competitors acquiring spectrum in separate and overlapping regions, and differentiated wireless services; investing in its extensive network; collectively covering most markets in Canada. By the end of 2010, evolving technologies when deemed prudent; and acquiring spectrum, four new entrants had launched services using portions of their AWS as appropriate, to facilitate service development and profitable expansion spectrum coverage and are expected to expand their roll-outs in of the Company’s subscriber base. 2011. Shaw Communications has announced that it expects to launch services in early 2012 (see key assumption discussion in Section 1.4). 10.2 Technology New entrants, with the exception of Quebecor (Videotron) in the province Technology is a key enabler for TELUS and its customers, however, of Quebec, are not expected to build networks in remote and rural technology evolution brings risks, uncertainties and opportunities. areas for some time, choosing instead to focus on urban markets and TELUS is vigorous in maintaining its short-term and long-term technology provide extended coverage for their urban-based subscribers through strategy to optimize the Company’s selection and timely use of tech- roaming agreements. To win market share, strategies of entrants nology, while minimizing the associated costs, risks and uncertainties. have included price discounting relative to incumbents, unlimited rate The following identifies the main technology risks and uncertainties plans or zone-based pricing, and increased competition at points of and how TELUS is proactively addressing them. distribution. Existing competitors have also become more aggressive, re-launching or introducing new brands. Evolving wired broadband access technology standards may TELUS anticipates continued pressure on average revenue per outpace projected access infrastructure investment lifetimes subscriber unit (ARPU), cost of acquisition (COA) and cost of retention The technology standards for broadband access over copper loops (COR) as competitors increase subsidies for handsets (particularly for to customer premises are evolving rapidly, enabling higher broadband generally more expensive smartphones), lower prices for airtime and access speeds. The evolution is fuelled by user appetite for faster con- wireless data, and offer other incentives to attract new customers. nectivity, the threat of increasing competitor capabilities and offerings, TELUS believes it has positioned itself well to respond to the arrival of and the desire of service providers like TELUS to offer new services, new entrants and increased competitive intensity from incumbents, such as IP TV, that require greater bandwidth. In general, the evolution but there can be no assurance that the Company’s preparations and to higher broadband access speeds is achieved by deploying fibre responses will be as successful as planned. further out from the central office, thus shortening the copper loop portion of the access network and using faster modem technologies Competition from adjunct wireless technologies may increase on the shortened copper loop. However, new access technologies While adjunct wireless technologies, like fixed WiMAX and Wi-Fi (wireless are evolving faster than the traditional investment cycle for access infra- fidelity), are continuing to develop, their associated economic viability structure. The introduction of these new technologies and the pace remains unproven. Regardless, increased competition is expected through

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of adoption could result in increased requirements for capital funding including telephony, Internet and video. However, digital-only broadband not currently planned, as well as shorter estimated useful lives for certain access may not be feasible or economical in many areas for some time, existing infrastructure, which would increase depreciation expenses. particularly in rural and remote areas. TELUS needs to support both Risk mitigation: TELUS actively monitors the development and carrier legacy and broadband voice systems for some time and, therefore, is acceptance of competing proposed FTTx standards (such as FTTH – expected to continue to incur costs to maintain both systems. There is a fibre to the home and FTTN – fibre to the neighbourhood). One or more risk that investments in broadband voice may not be accompanied by of these fibre-based solutions may be a more practical technology to decreased costs of maintaining legacy voice systems. There is also the deploy in brownfield neighbourhoods or multiple dwelling units (MDUs) risk that broadband access infrastructure and corresponding IP-telephony than the current xDSL deployments on copper loops. TELUS is exploring platforms may not be in place in time to avoid some re-investment business models for the economical deployment of fibre-based technol- in traditional switching platforms to support the legacy public switched ogies in areas currently connected by copper. In 2010, TELUS partnered telephone network access base in certain areas, resulting in some with developers to deploy FTTH using gigabit passive optical network investment in line adaptation in non-broadband central offices. (GPON) technology in greenfield residential developments to deliver much Additionally, even if TELUS were to decide to migrate towards a higher speeds to its customers. fully IP voice solution, the level of effort required to migrate customers As part of its multi-year broadband build program, TELUS has been could be costly. TELUS is also observing a large migration of users upgrading its network to IP DSLAMs with ADSL2+ technology, which away from traditional residential voice services onto cellular or compe- enables down link rates of up to 19 Mbps to the customer premises. titive offerings creating the possibility, when combined with long In 2009, TELUS began upgrading this IP DSLAM deployment to VDSL2 migration times, of significant over-investment in an alternative solution technology in certain urban areas to extend the capabilities of the copper for customers who may not be available to migrate. Migration to a loops to double previous speeds. VDSL2 technology enables typical DSL-based, primary voice offering will also require TELUS to develop down link rates of up to 30 Mbps, is backward-compatible with ADSL a strategy around battery back-up, proactive customer premises equip- and ADSL2+ and takes advantage of TELUS’ investments in extended ment (CPE) replacement and increased in-home support (truck rolls). reach copper/fibre access infrastructure. The VDSL2 deployment is Similarly, hosted business IP telephony has not experienced the uptake expected to be largely complete in 2011. industry analysts had predicted and its long-term future is unclear. The evolution of these access architectures and corresponding Risk mitigation: TELUS continues to deploy residential IP-based voice standards, enabled with quality of service standards and network traffic technologies into fibre-based communities and is working with vendors engineering, all support the TELUS Future Friendly Home strategy and industry to assess the technical applicability and evolving cost profiles to deliver IP-based Internet, voice and video services over a common of proactively migrating legacy customers onto IP-based platforms while broadband access infrastructure. striving to ensure adherence to CRTC commitments and customer expectations. TELUS’ ongoing investments in FTTN and access technol- IP-based telephony as a replacement for legacy analogue ogies should enable a smoother future evolution of IP-based telephony. telephony is evolving and cost savings are uncertain TELUS is also working with manufacturers to optimize the operations, TELUS continues to monitor the evolution of IP-based telephony tech- cost structure and life expectancy of analogue systems and solutions nologies and service offerings and has developed a consumer solution so that some of this infrastructure evolves to a point where it can form a for IP-based telephony over broadband access in accordance with part of the overall evolution towards IP. Additionally, IP-based solutions TELUS’ strategy and standards. Currently this solution is intended to that TELUS is currently deploying are capable of supporting a wide replace legacy analogue telephone service in areas that are served range of customers and services to help limit TELUS’ exposure to any by fibre-based facilities, however, this could expand to provide additional one market segment. For example, the new business VoIP platform telephone services over the same line as existing analogue service. is also capable of supporting consumer services and over-the-top TELUS is also in the process of designing and testing its next-generation capabilities in addition to a pure business VoIP offering. Going forward, IP telephony solution for business users, which is intended to replace as the Company’s wireless services evolve, TELUS will continue to assess existing, end-of-life business VoIP platforms as well as address areas the opportunity to further consolidate technology silos into a single that are served via fibre access. voice service environment. One of the realities of VoIP in the consumer space is that the actual state of technology developed to inter-work telephony, video and The convergence in a common IP-based application Internet access on the same broadband infrastructure is in its infancy environment for telephony, Internet and video is complex and there are risks and uncertainties to be addressed, such as ensuring Traditionally the technology and systems associated with telephony, all services can be delivered simultaneously to the home (and to differ- Internet and video were different from each other and provided little oppor- ent devices within the home) with uncompromised quality. These issues tunity for common platforms or cost savings and minimal flexibility to are exacerbated when the exchange of information is between service integrate media, services and service development environments. The providers with different broadband infrastructures. convergence in a common IP-based application environment, carried over A long-term technology strategy is to move all services to IP to a common IP-based network, provides opportunities for cost savings and simplify the network, reduce costs and enable advanced TELUS Future for the rapid development of more advanced services that are also more Friendly Home services. Pursuing this strategy to its full extent would flexible and easier to use. Further, the global standards for drawing together involve transitioning TELUS’ standard telephone service offering to classic wireline and wireless services into a combined architecture using IP-based telephony and phasing out legacy analogue-based telephone an IP multimedia subsystem are being actively ratified. However, the service. To this point, TELUS’ legacy voice network infrastructure could transformation from individual traditional silo systems and architectures be simplified if regular analogue telephone lines were discontinued to a common environment is very complex and could be associated with in favour of digital-only broadband access lines supporting all services implementation errors, design issues and system instability.

TELUS 2010 annual report . 95 Risk mitigation: In February 2010, TELUS began transitioning Risk mitigation: TELUS plans for this possibility in terms of future its previous IP TV middleware to next generation Microsoft Mediaroom. growth, maintenance and support of existing equipment and services. The Company expects it will complete the transition to Mediaroom in TELUS has a comprehensive contingency plan for multiple scenarios, 2011 and plans to expand the new platform over time. TELUS mitigates including exposure to multiple suppliers and ongoing strong vendor implementation risk through modular architectures, lab investments, relations. There can be no guarantee that the outcome of any vendor partnering with system integrators where appropriate, employee trials, restructuring will not affect the services that TELUS provides to its and using hardware that is common to most other North American customers, or that TELUS will not incur additional costs to continue IP TV deployments. TELUS is striving to ensure that its IP TV deployment providing services. is part of an open framework that will fit into the overall transformation strategy once standards are ratified and the actual implementations Wireless handset supplier concentration and have stabilized, particularly with the set-top box. TELUS is also active in market power a number of standards bodies such as the MEF and IP Sphere to help The popularity of certain models of smartphones and tablets from ensure its IP infrastructure strategy leverages standards-based function- Apple and RIM has resulted in an increasing reliance on these manufac- ality to further simplify the TELUS networks. turers, which may increase the market power that these suppliers have over TELUS. Support systems will increasingly be critical Risk mitigation: TELUS provides and promotes alternative devices, to operational efficiency including Android devices, to provide greater choice for consumers and TELUS currently has a very large number of interconnected operational help lessen TELUS’ dependence on a few key suppliers. and business support systems, and the complexity is increasing. This is typical of incumbent telecommunications providers that support Mature CDMA and iDEN wireless technologies a wide variety of legacy and emerging telephony, mobility, data and must coexist with new HSPA+ network video services. The development and launch of a new service typically The wireless industry continues to expand the deployment of second requires significant systems development and integration. The associated generation (2G), third generation (3G) and fourth generation (4G) technol- developmental and ongoing operational costs are a significant factor ogies to deliver increased data speeds required for many new wireless, in maintaining competitive position and profit margins. TELUS is proactive IP and data services. TELUS’ evolution to next generation wireless in evolving to next generation support systems, which leverage industry technologies involves services and devices that meet the requirements integration and process standards. As next generation services are intro- of the Company’s current and future subscriber base. duced, they should be designed to work with next generation systems TELUS continues to support CDMA2000 3G wireless services, frameworks and IT infrastructures, and at the same time, be compatible including EVDO revision A (DOrA) services. The Company believes CDMA with legacy services and support systems. This introduces uncertainty technology will continue to be used for some time. TELUS also continues with respect to the development and regression test costs, and delivery to support its Mike service that remains the Canadian leader with the of the solutions with the desired effect. largest number of subscribers using Push to Talk (PTT). U.S. carrier Sprint Risk mitigation: In line with industry best practice, TELUS’ approach recently announced that it plans to begin migrating iDEN services and is to separate the business support systems (BSS) from the operational subscribers to a CDMA-based PTT solution beginning in 2011 and will support systems (OSS) and underlying network technology. The aim begin a multi-year process to phase out its iDEN cell sites starting in 2013. is to decouple the introduction of new network technologies from the In addition, Sprint and Motorola announced an agreement that extends services sold to customers so both can evolve independently. This Motorola’s support of the Sprint iDEN network for three additional years should allow TELUS to optimize network costs while limiting the impact and covers the supply of software and services. TELUS’ iDEN sub- on customer services, and to facilitate the introduction of new services scribers represent less than 7% of total subscribers and the Company by driving BSS/OSS functions by configurable data rather than pro- continues to migrate Mike PTT customers to data devices on its HSPA+ grammatic changes. In addition, TELUS is an active participant in the network in a targeted manner. TELUS expects Nextel International to TeleManagement Forum that is working to develop standard industry- continue to support a strong iDEN ecosystem and services. However, defined modules in order to reduce cost through scale and increase there is a risk that this ecosystem may not provide the scale to ensure adoption through scope. TELUS has established a next generation sufficient iDEN device development, and that an HSPA-based PTT BSS/OSS framework to ensure that, as new services and technologies platform comparable in performance to that of iDEN may not be suf- are developed, they are part of the next generation framework to ease ficiently mature for wide-scale commercialization by TELUS in the same the retirement of legacy systems in accordance with TeleManagement timeframe that Sprint phases out its iDEN network. Forum’s Next Generation Operations Systems and Software program. The Company’s near-term growth is expected to be propelled mainly by HSPA+ technology, because of HSPA’s broader geographic adoption, Restructuring of equipment vendors may impact greater anticipated economies of scale, superior speeds and wider services and solutions TELUS provides device selection. As such, CDMA and iDEN coexistence with HSPA+ TELUS has a number of relationships with equipment vendors, which needs to be managed appropriately. are important to supplying the services and solutions TELUS provides Implementation of HSPA+ and other 4G network technologies to its retail and business customers. TELUS faces the risk that some and systems equipment vendors may experience business difficulties, may not remain TELUS successfully launched its HSPA+ network in November 2009, viable or may have to restructure their operations, which could impact under a network sharing agreement with Bell Canada that sped up their ability to support all of their products in future. This may negatively completion and reduced the Company’s costs of deployment nationally. impact the services and solutions TELUS provides.

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The Company expects its overall wireless and wireline capital intensity provision capacity and maintain high service levels in the face of growing level, excluding any capital that may be required for wireless spectrum demand and pace of innovation of data devices. auctions, to be approximately 17% of consolidated revenues in 2011. Risk mitigation: TELUS built an extensive wireless network based However, there is the risk that TELUS’ future wireless capital expenditures on HSPA+ technologies and is currently implementing HSPA+ dual-cell may be higher than those recorded historically in order to meet ongoing technology. The HSPA+ network positions TELUS to meet the capacity technology investments, including investments in HSPA+ dual-cell and demands and challenges in the foreseeable future. LTE technologies. In addition to the superior capabilities and higher capacity delivered by HSPA+, the infrastructure supporting TELUS’ network facilitates Technology evolution the future migration to LTE wireless technologies that are expected Although LTE is part of the technology evolution of a mature HSPA+ to further increase network capacity and speed. TELUS’ investments in platform, some operators in Canada or elsewhere may seek to accel- IP networks, IP/fibre cell-site backhaul and a software-upgradeable radio erate the deployment of LTE, which could influence the diversion infrastructure are expected to greatly facilitate rapid introduction of of resources from HSPA+ development by the vendor and operator LTE when this ecosystem reaches maturity. LTE technologies that TELUS communities, and could affect TELUS’ technology evolution plan. began testing in 2010 are expected to deliver download speeds of up Risk mitigation: As common and continual practice, TELUS optimizes to 100 Mbps, while at the same time introducing significant improvements capital investments to enable positive payback periods and good in performance. These improvements are expected to increase network flexibility to consider future technology evolutions. Certain capital invest- capacity, enhance performance, reduce delivery costs per megabyte ments, such as towers, leasehold improvements and power systems, of data, enable richer multimedia applications and services, and deliver are technology-agnostic. TELUS has a migration initiative underway a superior subscriber experience. to strategically move certain CDMA and Mike subscribers to high-speed Fast growth of wireless data volumes requires optimal and efficient data devices, thereby providing the potential to increase utilization of utilization of TELUS’ spectrum holdings. Deployment of HSPA+ tech- data services and stabilize revenue. TELUS expects to leverage the nology, the eventual launch of LTE technology and development of a economies of scale and handset variety with the HSPA+ device porfolio, capacity management toolkit aim to achieve efficient utilization of TELUS’ while continuing to take advantage of both the CDMA and iDEN spectrum holdings and position TELUS to meet increasing levels of data device portfolios. traffic. TELUS has developed a spectrum strategy to further strengthen The agreement with Bell Canada to jointly build out an HSPA network its ability to deliver the mobile Internet to Canadians in the future and provided the means for TELUS to better manage its capital expenditures intends to participate in upcoming spectrum auctions. If the Company and more quickly deliver a commercial network than could otherwise is successful in its bids, the additional spectrum would provide additional have been accomplished. TELUS’ continued collaboration with Bell capacity and mitigate risk of increasing data traffic, as well as allow Canada is expected to provide cost savings beyond the initial network for economic deployment of LTE services in rural coverage areas. build and flexibility to invest in service differentiation. TELUS maintains a close liaison with its network technology suppliers Transition to other 4G wireless technologies could be and operator partners to influence and benefit from developments in slowed by delays in development of an LTE ecosystem iDEN, CDMA and HSPA technologies. By contracting its suppliers to The timing for the standardization and development of LTE technologies provide technology solutions that are amenable to future advancements aligns with the need for additional network capacity required to address like LTE, TELUS can mitigate the operational disruption during tech- the surging demand for wireless data. However, just as with any other nology transitions. Fundamental to TELUS’ strategy is the reuse and new wireless technology, there remain significant challenges that the redeployment of application servers and network elements that are industry needs to overcome in the first few years following standardization, access-agnostic, such as messaging into the latest radio access and prior to being able to successfully support large LTE deployments. technology. This enables TELUS to invest in radio-based technologies These include both technological and business challenges: harmonization as they evolve and as required, without the need to replace these of global spectrum, intellectual property rights, support for voice and application servers. SMS, interoperability, device availability, technology maturity, operational readiness and costs. The wireless industry appears committed to Subscriber demand for data may challenge wireless making LTE the worldwide technology standard, as evidenced by its networks and is expected to be accompanied by R&D, testing and interoperability efforts. Despite this, there remains decreasing unit-pricing a risk that the development of a robust LTE ecosystem may experience The demand for wireless data services has been growing at unprece- some delays; these delays, against a background of surging data dented rates and it is projected that this demand will further accelerate, traffic demand, represent a risk for the operator. driven by increases in: broadband penetration; the need for personal Risk mitigation: TELUS’ implementation of LTE technologies will connectivity and networking; affordability of smartphones and high-usage primarily be driven by a business case that is based on the launch of data devices (such as the iPhone, mobile Internet keys and tablets), TELUS’ HSPA+ network, and as such, TELUS’ focus remains on the and machine-to-machine data applications; increasingly rich multimedia revenue growth opportunities that this new network enables. In support services and applications; and increasing wireless competition that of this, TELUS’ wireless network is ready to evolve through software may include more affordable data plans. In addition, given the highly upgrades to support enhancements in HSPA+ that improve performance, competitive wireless business environment in Canada, it is expected that capacity and speed. In parallel, and complementary to the evolution wireless data revenues will grow more slowly than traffic demand. This of HSPA+, TELUS is developing a comprehensive capacity management gap between traffic and revenue growth represents one of the most toolkit that will help address traffic growth challenges prior to the significant challenges for operators in this mobile Internet era. introduction of LTE, and which also is expected to complement LTE In this mobile Internet era, accelerating data traffic levels represent once it is deployed. a growing challenge to the current mobile network’s ability to adequately

TELUS 2010 annual report . 97 10.3 Regulatory On April 4, 2007, the Governor in Council issued Order in Council P.C. 2007-532 and varied Telecom Decision 2006-15 by changing the Regulatory developments could have a material impact criteria for local forbearance for residential and business local exchange on TELUS’ operating procedures, costs and revenues services. Forbearance for residential local exchange service is granted TELUS’ telecommunications and broadcasting services are regulated when there are two independent facilities-based competitors (of which under federal legislation by the Canadian Radio-television and Tele- one can be a wireless service provider) capable of serving at least 75% communications Commission (CRTC), Industry Canada and Heritage of the residential lines in the exchange. For business local exchange Canada. The CRTC has taken steps to forbear from regulating prices service, forbearance is granted when one facilities-based competitor is for services offered in competitive markets, such as local residential and able to serve at least 75% of the business lines. In addition, a number business services in selected exchanges, long distance and some data of quality-of-service indicators must be met for the six-month period prior services, and does not regulate the pricing of wireless services. Local to the forbearance application. telecommunications services that have not been forborne are regulated Since the Order in Council was issued, TELUS has obtained for- by the CRTC using a price cap mechanism. A current major area of bearance for about 74% of its local residential service lines and about regulatory review is the ILECs’ obligation to serve. 75% of local business service lines in B.C., Alberta and Eastern Quebec. The outcome of the regulatory reviews, proceedings and appeals As a result of the forbearance granted for local residential and discussed below and other regulatory developments could have a business services, TELUS believes it has significantly enhanced flexibility material impact on TELUS’ operating procedures, costs and revenues. in pricing, promotions and bundling to compete with other providers of these services. However, TELUS has no assurance that it will be Future availability and cost of wireless spectrum able to prevent further market share loss in these markets or that it will Industry Canada plans to auction spectrum in both the 700 MHz and be able to obtain forbearance in other exchanges where it is facing 2.5/2.6 GHz bands in the late 2011 to 2013 timeframe. There is uncer- competition for residential and business customers. tainty regarding the government’s timing and position in regulating these potential spectrum bands. Auction rules may, for example, favour Price cap regulation non-incumbents. As the rules for future auctions are unknown, the Price cap regulation continues to apply to a basket of local services capital outlay required to successfully bid on additional spectrum provided by ILECs. TELUS is subject to price cap regulation as an ILEC is uncertain, and how much spectrum will be secured in each region in B.C., Alberta and Eastern Quebec. On April 30, 2007, the CRTC is unknown. A 700 MHz spectrum auction discussion paper was issued Telecom Decision 2007-27 (third price cap period) and established issued at the end of 2010 but it is possible that most new spectrum an open-ended price cap regime. will not be available for mobile purposes prior to 2012. During the second price cap period (2002 to 2007), funds were Currently, spectrum at 2.5 GHz has been used for fixed wireless added to a deferral account as a result of a freeze on residential and fixed wireless broadcast applications. However, this spectrum telephone rates in urban areas instead of reducing these rates by the band has been given a primary mobile designation by Industry Canada amount required by the price cap formula. The CRTC later determined and is expected to become a common global band for mobile services. that these deferral account funds should be used for broadband In 2006, Industry Canada issued a policy that provides for a clawback expansion in rural and remote areas and to improve access to telecom- of a portion of the band for auction when mobile service is implemented munications services for the disabled. Any remaining funds were to within the band, and stated that it intends to auction unassigned be rebated to customers. portions of the multipoint distribution service portion of the band. TELUS On August 31, 2010, the CRTC issued its final determination expects that an auction discussion paper will be announced by late on the use of deferral account funds in Telecom Decision 2010-639. 2011 and an auction scheduled sometime in 2012 or later. The CRTC finalized the deferral account balance and approved Competitors Bell and Rogers hold significant amounts of spectrum the use of a portion of the deferral account funds by TELUS to expand at 2.5 GHz through their Inukshuk partnership, and have deployed a broadband services to 159 communities in B.C., Alberta and Quebec. fixed wireless solution for portable DSL service in major cities including The CRTC also directed TELUS to rebate $54.5 million to residential Toronto, Montreal, Calgary, Edmonton and Vancouver. Although TELUS customers in non-high cost service areas and allowed the Company has experienced only limited competition from this and similar services flexibility in the method of rebate to such residential subscribers to date, there can be no assurance that future marketing of these services at the date of the decision, including offering promotions of unrelated will not negatively impact TELUS’ wireless or wireline services. products of greater value than a cash rebate – such promotions to be concluded by the end of February 2011. The Commission also Local forbearance approved the use of the balance of the deferral account for broadband On December 14, 2006, the Governor in Council issued a direction expansion in rural areas of B.C., Alberta and Eastern Quebec over to the CRTC to: a period ending in 2014 and finalized amounts to be used for improve- . Rely on market forces to the maximum extent feasible ment of accessibility for the disabled. On October 29, 2010, Bell Canada . Ensure technological and competitive neutrality and enable was granted approval to use wireless technology instead of wireline competition from new technologies ADSL technology to provide broadband service to its approved commu- . Use tariff approval mechanisms that are as minimally intrusive nities in Ontario and Quebec. However, the deferral account funds as possible that Bell Canada can use for this broadband expansion were capped . Complete a review of the framework for mandated access to at the amount that it would cost to implement using ADSL technology. wholesale services TELUS may also consider using wireless technology to provide . Publish and maintain performance standards for its various processes broadband service in some deferral account communities. . Continue to explore new ways of streamlining its processes.

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Broadcasting distribution undertakings Highlights of the CRTC decision include: TELUS holds licences from the CRTC to operate terrestrial broad- . ILECs are to provide speed-matching for ADSL service (including casting distribution undertakings to serve various communities in B.C. ADSL2, ADSL2+, VDSL and VDSL2) to wholesale Internet service and Alberta (renewed in 2009 for a second full seven-year term), and providers (ISPs) in Eastern Quebec (licensed in July 2005). TELUS also holds a licence . New wholesale tariffs can include an additional 10% mark-up to operate a national video-on-demand (VOD) undertaking (licensed in for newer higher speeds on top of the current regulatory mark-up September 2003 and in the process of being renewed). The Company’s for existing wholesale ADSL services strategy is to aggregate, integrate and make accessible content and . Cable-TV companies already provide speed-matching for their applications for customers’ enjoyment. The Company does not believe it third-party Internet access (TPIA) facilities but now have new is necessary to own content. (See Section 10.1 Competition – Increasing interconnection obligations vertical integration by competitors into broadcast content ownership.) . The decision, including speed-matching requirements, applies The broadcasting landscape has undergone significant consolidation to FTTN ILEC facilities and DOCSIS 3.0 cable-TV company facilities with the acquisition by Shaw of the programming services of Canwest . Fibre-to-the-premises (FTTP) facilities are not subject to unbundling Global (a transaction approved by the CRTC in October 2010) and obligations at this time the acquisition by Bell of the programming services of CTVglobemedia . TELUS is not required to adapt its networks to enable end- (approval being considered by the CRTC following a hearing held in customers to receive Optik TV from TELUS and Internet service February 2011). Given the potential for anti-competitive behaviour in this from a wholesale provider, where there is only a single loop new vertically integrated market environment, the CRTC has launched available to the end customer. a policy hearing to consider what safeguards might be necessary to TELUS is currently participating in a follow-up CRTC process regarding ensure healthy competition. The policy hearing on vertical integration the tariff approval of its speed-matching wholesale ADSL services. will be held in June 2011. Absent additional safeguards, there is a poten- It is expected that this process will be completed in the second quarter tial risk that vertically integrated competitors could unfairly raise their of 2011. programming costs to TELUS and/or attempt to withhold content on “new This reaffirmed decision may reduce broadband competition by media” platforms (Internet and mobile platforms) or otherwise disadvan- reducing or slowing down the roll-out of advanced services in marginal tage TELUS in attracting wireless or TELUS TV customers. Notably, on areas, or by increasing the propensity for carriers to lease rather than January 27, 2011, in Broadcasting Decision 2011-48, the CRTC released build. The decision could reduce capital investment in rural and smaller its determination regarding TELUS’ complaint against Videotron for markets to offset the costs of sharing in urban markets. There is robust undue preference conferred to its own VOD service by making its VOD competition for high-speed Internet services already in the marketplace, service the exclusive provider of the most popular programming of its including wireless and satellite Internet services that are substitutes sister company TVA. The CRTC found that Videotron had in fact given for wireline services. itself undue preference and subjected TELUS to a disadvantage. The CRTC ordered that TVA programs distributed on VOD be provided Usage-based billing for gateway access services without delay to TELUS. This decision is positive for TELUS particularly and third-party Internet access services for the provision of Optik TV in Eastern Quebec. In Telecom Decision 2011-44, the CRTC determined that usage-based On March 22, 2010, the CRTC introduced a new framework billing rates for an ILEC’s wholesale residential gateway access services to allow over-the-air television broadcasters to enter into negotiations or equivalent services, and for an incumbent cable-TV carrier’s third-party with broadcasting distribution undertakings to establish a fair value for Internet access services, are to be established at a discount of 15% from the distribution of their local over-the-air television signals. As there the carrier’s comparable usage-based billing rates for its retail Internet is uncertainty whether the CRTC has the authority to implement such services. The Government of Canada has announced its intention to a signal compensation regime, the CRTC referred the matter to the review this decision. This review is expected to be completed by March 1, Federal Court of Appeal seeking clarification of its jurisdiction under the 2011. The Government of Canada can uphold or overturn the decision, Broadcasting Act. The decision of the Federal Court of Appeal is still or ask the CRTC to reconsider it. The CRTC has initiated a separate review pending but may be superseded by a reconsideration of this policy as part of billing practices for wholesale residential high-speed access services of upcoming proceedings where issues surrounding vertical integration (Telecom Notice of Consultation 2011-77). The review is in regard to will be discussed. In the event that the value for signal regime proposed the terms upon which large incumbent telephone and cable-TV carriers by the CRTC is actually implemented, it could lead to an increase in cost provide their services to wholesalers, who, in turn, provide high-speed of offering of Optik TV that TELUS may not be entirely able to recover Internet access to retail residential customers. The CRTC’s stated approach through price increases due to competition in the broadcasting distribution in reviewing this matter will be based on two fundamental principles: market from vertically integrated broadcasting conglomerates. (1) as a general rule, ordinary consumers served by small Internet service providers (ISPs) should not have to fund the bandwidth used by the Wholesale high-speed Internet access services proceeding heaviest retail Internet service consumers; and (2) smaller ISPs should On August 30, 2010, the CRTC reaffirmed its 2008 decision to require continue to be in a position to offer competitive and innovative alternatives. unbundling of ADSL2+ and other advanced DSL-based services in The review is expected to continue into the second quarter of 2011. Telecom Regulatory Policy CRTC 2010-632. The ILECs had successfully appealed to the Federal Cabinet to delay unbundling. Cabinet ordered Radiocommunication licences regulated by Industry Canada the CRTC to re-examine the issue in light of the level of competition All wireless communications depend on the use of radio transmis- for Internet services, the impact on incentives to invest in broadband sions and, therefore, require access to radio spectrum. Under the networks and any effects on the ILECs’ roll-out of IP TV. Radiocommunication Act, Industry Canada regulates, manages and

TELUS 2010 annual report . 99 controls the allocation of spectrum in Canada, and licenses frequency the Telecommunications Act or to maintain, renew or secure licences bands and/or radio channels within various frequency bands to under the Radiocommunication Act and Broadcasting Act could be service providers and private users. Voice and data wireless commu- jeopardized and TELUS’ business could be materially adversely affected. nications via cellular, specialized mobile radio (SMR), enhanced In June 2008, the Competition Policy Review Panel provided its final specialized mobile radio and PCS systems, among others, require report to the Minister of Industry. The Panel made a number of recommen- such licences. TELUS’ PCS and cellular licences include various dations to liberalize foreign ownership rules for the telecommunications terms and conditions, such as: and broadcasting sectors. Subsequently, the federal government Throne . Meeting Canadian ownership requirements Speech on March 3, 2010 and the federal budget on March 4, 2010 . Meeting obligations regarding coverage and build-out signalled an intention to consider opening the telecommunications ser- . Spending at least 2% of certain PCS and cellular revenues vices sector to further foreign investment. In June 2010, Industry Canada on research and development unveiled three options for consultation on lifting foreign ownership . Annual reporting restrictions for telecommunications companies: . Resale to competitors. 1. Increase the limit for direct foreign investment in broadcasting and telecommunications common carriers to 49% While TELUS believes that it is substantially in compliance with its licence 2. Lift restrictions on telecommunications common carriers with conditions, there can be no assurance that it will be found to comply a 10% market share or less, by revenue with all licence conditions, or if found not to be compliant that a waiver 3. Remove foreign ownership restrictions completely. will be granted, or that the costs to be incurred to achieve compliance will not be significant. Initial licence fees and annual renewal fees are In the context of the Industry Canada consultation, TELUS advanced payable for licences that have not been obtained via spectrum auction. a fourth option: Should the government opt to lift foreign ownership 700 MHz spectrum: Industry Canada has initiated a consultation restrictions, they should be symmetrically lifted for all telecommunica- on the 700 MHz band with an auction likely in late 2011 or 2012. There tions carriers and broadcasting distribution undertakings, and should is no guarantee that the Canadian government will not reserve spectrum be retained for broadcasters (i.e. content providers). Under the TELUS for new entrants or that it will not adopt some open access provisions proposal, a vertically integrated company operating both carriage for some of this spectrum, as was done in the U.S. and content businesses could not be foreign owned. A vertically inte- 800 MHz re-banding: In 2004, the U.S. Federal Communications grated company choosing to sell its carriage business to a foreign Commission (FCC) released a Report and Order adopting a plan to resolve buyer must ensure that the content business remains under separate interference with public safety radio systems in the 800 MHz band. Sprint- Canadian ownership and control. Nextel’s iDEN system was identified as the primary contributor to this On November 22, 2010, the Minister of Industry announced the interference. The U.S. is planning to realign the band so that public safety government’s intent to address the matter later in 2011 in the context systems would be relocated to the bottom of the 800 MHz band and of rule setting for upcoming spectrum auctions expected in 2012. Sprint-Nextel’s iDEN system would operate in the upper part of the band. A consultation on rule setting for the 700 MHz spectrum auction was In Canada, the TELUS Mike (iDEN) network also uses this same launched on November 30, 2010, with comments accepted until frequency spectrum. Because each site for the Mike network is analyzed February 28, 2011, and reply comments accepted until March 30, 2011. and licensed individually, TELUS and Industry Canada have been able In the interim, there remains some uncertainty regarding the inter- to minimize the number of public safety interference issues to a few pretation of the existing rules due to a Cabinet decision. On December 10, across the country versus more than 1,500 in the U.S. 2009, the Governor in Council (on behalf of the Federal Cabinet) issued However, TELUS has an existing special co-ordination procedure Order in Council P.C. 2009-2008, which overturned an October 29, 2009 (SCP), endorsed by both Industry Canada and the FCC, wherein TELUS decision by the CRTC (Telecom Decision 2009-678) that found that and Sprint-Nextel utilize each other’s channels within their respective wireless new entrant Globalive did not meet Canada’s foreign ownership iDEN networks at specific border areas across the country. These laws due to the substantial capital backing of Egypt-based Orascom channels serve to increase the number of channels available to both Telecom. Notwithstanding the Governor in Council’s claim that its deci- networks to better serve the area. The realignment threatens the sion was particular to facts of the Globalive case, it appeared that a new continued use of the channels specified in the SCP. precedent had been set with respect to loosening foreign ownership While discussions with both the Canadian and U.S. regulators restrictions in telecommunications, broadcasting and other sectors where indicate that TELUS should be able to continue to have access to a the “control in fact” test has traditionally been applied. On January 8, 2010, certain number of SCP channels in the border areas, until such time Public Mobile Inc. filed an application for judicial review with the Federal as the U.S. announces its final decision, there is no assurance that Court of Appeal seeking to overturn the Governor in Council’s Decem- TELUS will be able to continue to use these channels. ber 10, 2009, decision declaring Globalive to be eligible to operate as a Canadian carrier. Public Mobile Inc.’s application for a judicial review Foreign ownership restrictions was opposed by the federal government and by Globalive. The Federal TELUS and its subsidiaries are subject to the foreign ownership restric- Court of Appeal decision was released on February 4, 2011, striking tions imposed by the Telecommunications Act, the Radiocommunication down the Order in Council that overturned CRTC Decision 2009-678 and Act and the Broadcasting Act and associated regulations. Although issuing a 45-day stay of judgement, which Globalive is seeking to extend. TELUS believes that TELUS Corporation and its subsidiaries are in com- The federal government and Globalive announced that they intend to pliance with the relevant legislation, there can be no assurance that a appeal the Federal Court of Appeal ruling. future CRTC, Industry Canada or Heritage Canada determination, or There is no assurance that resolution of uncertainty over interpretation events beyond TELUS’ control, will not result in TELUS ceasing to com- of existing laws and regulations concerning foreign ownership restrictions ply with the relevant legislation. If such a development were to occur, that TELUS is subject to, or the manner in which they may be changed, the ability of TELUS’ subsidiaries to operate as Canadian carriers under will be beneficial to TELUS.

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Risk mitigation for regulatory matters: TELUS generally advocates a a 300 basis point increase in the measure of TELUS’ employee engage- regulatory environment in telecommunications that relies, to the greatest ment. Management believes the following were influencing factors: extent possible, on market forces rather than regulatory intervention, . Increased communications with front-line team members while in the case of the distribution of broadcasting content, it supports . A focus on the customer and additional support for those team a symmetrical regime under the Broadcasting Act that ensures all members performing in that capacity Canadian consumers continue to have equitable access to broadcast . Winning in the marketplace due to innovative high-quality products content irrespective of the distributor or platform they choose. TELUS and services available to customers on TELUS’ enhanced wireline believes that, as long as content is regulated to achieve cultural objectives, and wireless networks. this is in the best interest of all carriers and their customers. TELUS TELUS will continue to focus on other non-monetary factors that have does not oppose the removal of foreign ownership restrictions in a clear alignment with engagement including: telecommunications, or on the distribution of content, provided that . Performance management liberalization is implemented on a fair and symmetrical basis for all . Career opportunities telecommunications carriers and broadcast distribution undertakings. . Training and development . Recognition 10.4 Human resources . Work styles (e.g. facilitating working remotely from home and Employee retention and engagement alternative work locations). The success of TELUS depends on the abilities, experience and engage ment of its team members. Competition for highly skilled and Collective bargaining entrepreneurial management and front-line employees is intense in the In August 2010, the membership of Syndicat québécois des employés communications industry. The loss of key employees – or deterioration de TELUS (SQET) in the TELUS Québec region ratified a new collective in overall employee morale and engagement from organizational changes, agreement that will expire on December 31, 2014. This agreement covers unresolved collective agreements or ongoing cost reduction – could have approximately 1,000 trades, clerical and operator services team members. an adverse impact upon TELUS’ growth, business and profitability. TELUS The collective agreement with the Telecommunications Workers continues its focus on efficiency initiatives that include an evolution of Union (TWU) expired on November 19, 2010. Collective bargaining began the Company’s performance bonus program tying it directly to corporate in July 2010 and continues as of the date of this MD&A. The TWU con- profitability. To help contain expenses, the Company and its employees tract applies to approximately 11,000 employees across Canada in TELUS’ continue to share cost increases associated with the benefits program. wireline and wireless business segments. With expanding competition in the telecommunications industry, In any set of labour negotiations, there can be no assurance that the employee retention risk is expected to remain elevated in 2011. TELUS negotiated compensation expenses or changes to operating efficiency aims to attract and retain key employees through both monetary will be as planned and may result in unanticipated increased costs and/ and non-monetary approaches, striving to both protect and improve or reduced productivity. In addition, there can be no assurance that engagement levels. However, there can be no assurance that such reduced productivity and work disruptions will not occur during the approaches will be as successful as planned. course of collective bargaining prior to settlement. Risk mitigation: The compensation program at TELUS is designed Risk mitigation: A governance model is in place to ensure the to support its high-performance culture and is both market-driven financial and operating impact of any proposed terms of settlement are and performance-based. This includes: assessed and determined to be aligned with TELUS’ strategic direction. . Employee performance bonuses based on individual contributions Any potential need to continue operations in response to work disrup- as well as a corporate component tions has been addressed through extensive contingency planning and . Share options for eligible employees emergency operations plans. Though the Company has built and vali- . Restricted stock units (RSUs) and performance stock units (PSUs) dated emergency operations plans, there can be no assurance that all for eligible employees potential issues have been planned for or that the contingencies planned . TELUS Employee Share Purchase plan available to all domestic for will manifest in exactly the same fashion as tested. As a result, there full-time and part-time employees. is risk that increased costs or disruptions may still occur.

Medium-term and long-term performance incentives (RSUs, PSUs 10.5 Process risks and share options) for key personnel generally have three-year vesting periods. The increased value of TELUS shares in 2010 has increased Systems and processes the effectiveness of these retention incentives. Where required, TELUS TELUS has numerous complex systems and process change initiatives also continues to implement targeted retention solutions for employees underway. There can be no assurance that the full complement of the with talents that are scarce in the marketplace. Company’s various systems and process change initiatives will be As well, a benefits program is offered that allows the tailoring of successfully implemented or that sufficiently skilled resources will be personal health, wellness, lifestyle and retirement choices to suit individual available to complete all key initiatives planned for 2011 and beyond. and family needs. There is risk that certain projects may be deferred or cancelled and the By striving to ensure TELUS’ compensation and benefits remain expected benefits of such projects may be deferred or unrealized. com petitive, the Company seeks to maintain the ability to attract Risk mitigation: In general, TELUS strives to ensure that system and retain key employees. With respect to ongoing program cost man- development priorities are selected in an optimal manner. TELUS’ project agement, the Company hopes to manage engagement levels through management approach includes extensive risk identification and con- direct and upfront communication to all employees as part of an tingency planning, scope and change control, and resource and quality overall business ownership culture. A positive indicator in 2010 was management. The quality assurance of the solutions includes extensive

TELUS 2010 annual report . 101 functional, performance and revenue assurance testing, as well as Foreign operations capturing and utilizing lessons learned. In addition, TELUS often moves Maintaining TELUS’ international operations presents unique risks, its business continuity planning and emergency management operations including country-specific risks (such as different political, legal and centre to a heightened state of readiness in advance of major systems regulatory regimes and cultural values), lack of diversity in geographical conversions. locations, concentration of customers, different taxation regimes, infra- structure and security challenges, different exposure to and frequency Large enterprise deals of natural disasters, and the requirement for system processes that work TELUS’ operating efficiency and earnings may be negatively impacted across multiple time zones, cultures and countries. There can be no by challenges with (or ineffective) implementation of large enterprise assurance that international initiatives and risk mitigation efforts will provide deals, which may be characterized by service credits that lower revenues, the benefits and efficiencies expected, or that there will not be significant significant upfront expenses and capital expenditures, and a need to difficulties in combining the different management and cultures, which anticipate, understand and respond to complex and multi-faceted could result in a negative impact on operating and financial results. enterprise customer-specific requirements and stakeholders. There can Risk mitigation: TELUS’ strategy is to improve the diversity and geo- be no assurance that service implementation will proceed as planned graphic distribution of its operations, customers and conduct of business and expected efficiencies will be achieved, which may impact return on process outsourcing activities. TELUS has in recent years expanded investment or desired margins to be realized. The Company may also its Philippines operations to locations in India, Central America, the be constrained by available staff, system resources and co-operation of Caribbean region and the U.S. state of Nevada. The continued expansion existing service providers, which may limit the number of large contracts of international operations provides TELUS with more geographic diver- that can be implemented concurrently in a given period and/or increase sity, spreads political risk among the foreign jurisdictions, provides the the cost to TELUS related to such implementations. Company an ability to serve customers in multiple languages and in Risk mitigation: TELUS has gained experience in implementing multiple time zones, and through network redundancy and contingency numerous large enterprise deals over a number of years and expects planning, provides the ability to divert operations in emergency situations. to continue to focus on implementing recent large enterprise contract The Company continues to work with its international operations to wins. In addition, the Company expects to continue being selective extend operational best practices, to integrate and align international as to which new large contracts it will bid on and to increase its focus and domestic Canadian operations, as appropriate, and to ensure that on the SMB market. internal controls are implemented, tested, monitored and maintained. TELUS continues to realize the benefits of implementing internal TELUS also maintains a currency hedging program to reduce certain reorganizations, including the consolidation of three enabling units into foreign currency exposures. two integrated teams: Technology Strategy and Business Transformation and Technology Operations, as well as the consolidation of certain Integration of acquisitions customer-facing business units. The expected benefits include stream- Post-merger and post-acquisition activities include the review and lined operations, more effective deployment of technologies and alignment of accounting policies, employee transfers and moves, supporting systems, cost efficiencies, improved customer service, and information systems integration, optimization of service offerings and better capability to implement large enterprise deals. TELUS follows establishment of control over new operations. Such activities may not industry standard practices for rigorous project management, including be conducted efficiently and effectively, negatively impacting service executive (senior) level governance and project oversight; appropriate levels, competitive position and expected financial results. project resources, tools and supporting processes; and proactive Risk mitigation: TELUS has a team that performs a post-merger project-specific risk assessments and risk mitigation planning. TELUS integration (PMI) function. The PMI team applies an integration model, also conducts independent project reviews and internal audits to help based on learnings from numerous previous post-acquisition integrations, monitor progress and identify areas that may require additional focus, which enhances and accelerates the standardization of TELUS’ busi- and to identify systemic issues and learnings in project implementations ness processes and strives to preserve the unique qualities of acquired which may be shared among projects. operations. PMI begins with strategic, pre-closing analysis and planning, and continues after closing with the execution of a plan. Initial plans are Reorganizations re-evaluated and assessed regularly, based on timely feedback received Arising from its operating efficiency program, the Company carries from the integration teams. out a number of operational consolidation, rationalization and integration initiatives each year. For 2010 initiatives, see Section 2.2 Strategic Data protection imperatives – Investing in internal capabilities. The initiatives are aimed Some of the Company’s efficiency initiatives rely on offshoring of internal at improving the Company’s operating productivity and competitiveness. functions to TELUS International’s operations and leveraging partners There can be no assurance that all planned efficiency initiatives will domestically and abroad. To be effective, offshore and partner relation- be completed, or that such initiatives will provide the expected benefits ships require TELUS to provide access to the Company’s data. Remote or will not have a negative impact on operating performance, employee access to TELUS data could lead to data being lost, compromised or engagement, financial results and customer service. accessed by third parties potentially for inappropriate use, negatively Risk mitigation: TELUS focuses on and manages organizational impacting the Company’s competitive position, financial results and brand. changes through a formalized business transformation function by Risk mitigation: A core component of TELUS’ strategy is for data to leveraging the expertise, key learnings and best practices gained from reside in TELUS facilities in Canada, with the deployment of infrastructure mergers, business integrations and efficiency-related reorganizations to support partner connectivity to view these TELUS systems. TELUS in recent years. International and partners are provided with remote views of the data without it being stored on local systems.

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Another core component of the TELUS strategy is payment card A reduction in TELUS credit ratings could impact industry (PCI) compliance, a rigorous set of standards leveraging the latest the Company’s cost of capital and access to capital security technology, such as encryption, to ensure the protection of cus- The Company’s cost of capital could increase and access to capital tomer credit card information. These capabilities are being introduced might be affected by a reduction in the credit ratings of TELUS and/or and implemented by TELUS and TELUS International in accordance with TCI. There can be no assurance that TELUS can maintain or improve the ongoing PCI certification program. current credit ratings. Risk mitigation: TELUS seeks to maintain debt credit ratings in 10.6 Financing and debt requirements the range of BBB+ to A–, or equivalent. The four credit rating agencies that rate TELUS currently have ratings that are in line with this target TELUS’ business plans and growth could be negatively with a stable outlook or trend and have confirmed TELUS’ ratings for affected if existing financing is not sufficient to cover 2010. TELUS has financial policies in place that were established to funding requirements help maintain or improve existing credit ratings. (See Section 7.4 Liquidity Risk factors such as disruptions in the capital markets, increased bank and capital resource measures.) capitalization regulations, reduced lending in general, or a reduced number of active Canadian chartered banks as a result of reduced activity Lower than expected free cash flow could constrain ability or consolidation, could reduce capital available or increase the cost to invest in operations or reduce debt of such capital for investment grade corporate issuers such as TELUS. TELUS expects to generate free cash flow in 2011 after investing Risk mitigation: TELUS may finance future capital requirements approximately $1.7 billion of capital expenditures. Free cash flow would with internally generated funds, borrowings under the unutilized portion be available to, among other things, pay dividends to the Company’s of its bank credit facility, use of securitized accounts receivable, use of shareholders. While anticipated cash flow is expected to be more than commercial paper or the issuance of debt or equity securities. TELUS sufficient to meet current requirements and remain in compliance with has a shelf prospectus available until October 2011, under which, TELUS’ financial policies, these intentions could constrain TELUS’ ability as at December 31, 2010, it can offer up to $2 billion of debt and equity. to invest in its operations for future growth. As described in Section 1.5, TELUS believes its adherence to its stated financial policies and the payment of net cash income taxes and funding of defined benefit pension resulting investment grade credit ratings, coupled with its efforts to main- plans in the future will reduce the after-tax cash flow otherwise available tain a constructive relationship with banks, investors and credit rating to return capital to the Company’s shareholders. If actual results are agencies, continue to provide reasonable access to capital markets. different from TELUS’ expectations, there can be no assurance that The Company has a $2 billion credit facility ($1.78 billion available at TELUS will not need to change its financing plans, including its intention December 31, 2010) that expires on May 1, 2012. This facility allows to pay dividends according to the target payout guideline. the Company to continue to meet one of its financial objectives, which Risk mitigation: The TELUS Board reviews the dividend each quarter, is to generally maintain $1 billion in available liquidity. As described in based on a number of factors including a target dividend payout ratio Section 7.6 Accounts receivable sale, TELUS Communications Inc. also guideline of 55 to 65% of sustainable net earnings on a prospective has an agreement with an arm’s-length securitization trust under which basis. This review resulted in TELUS announcing two quarterly dividend it is able to sell an interest in certain of its trade receivables up to increases in 2010, with the fourth quarter declaration at $0.525 per a maximum of $500 million. At December 31, 2010, TCI had received share for dividends paid in January 2011. Based on the beginning-of-year aggregate cash proceeds of $400 million, with $100 million available. level of quarterly dividend and shares outstanding, annualized dividend TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd., payments would total approximately $675 million in 2011. The Company failing which, the Company may be required to wind down the program announced a return to the purchase of shares in the open market prior to the May 2012 termination date of the agreement. for reinvested dividends rather than issue shares from treasury. In the future, TELUS could seek Board approval to return to issuing shares Ability to refinance maturing debt from treasury for reinvested dividends, in order to reduce cash outflows At December 31, 2010, the only significant maturity of long-term debt in in respect of dividends. 2011 is the remaining U.S.$741 million of 8% Notes due June 1. TELUS The Company’s financial instruments, and the nature of credit risks, also operates a commercial paper program (maximum of $1.2 billion) that liquidity risks and market risks that they may be subject to, are described permits access to low-cost funding. At December 31, 2010, TELUS had in Financial instruments in Section 7.8. $104 million of commercial paper issued, which must be refinanced on an ongoing basis to enable the cost savings relative to borrowing on the 10.7 Tax matters 2012 credit facility to be realized. Capital market conditions may prohibit the rolling of commercial paper at low rates. Income and commodity tax amounts, including tax expense, Risk mitigation: Through successful financing activities in 2010 may be materially different than expected (see Section 7.3), TELUS increased the average term to maturity of its The operations of TELUS are complex and related tax interpretations, long-term debt to 5.7 years at December 31, 2010, from 5.0 years at regulations and legislation that pertain to TELUS’ activities are subject to December 31, 2009. The Company’s commercial paper program is fully continual change. The Company collects and pays significant amounts backstopped by the 2012 credit facility. In 2011, TELUS may issue addi- of commodity taxes, such as provincial sales taxes, harmonized sales tional long-term debt to help refinance the maturing 8% Notes, although taxes and federal goods and services taxes, to various taxation authorities. the Company has sufficient unutilized credit facilities to refinance this The Company also accrues and pays significant amounts of income debt without accessing the long-term debt markets. At December 31, taxes and has significant future income tax liabilities and income tax 2010, TELUS’ long-term debt was $6.06 billion, with various amounts expense. Income tax amounts are based on TELUS management’s esti- maturing from 2011 to 2025 (see Section 4.3 for a debt maturity profile). mates, using accounting principles that recognize the benefit of income

TELUS 2010 annual report . 103 tax positions that are more likely than not of being sustained upon and foreign external advisors, to provide tax advice and to assess foreign examination on an issue-by-issue basis. The benefit is measured at tax issues and risks. This team is also responsible for the specialized the largest amount with greater than 50% probability of being realized. accounting required for income taxes, and accordingly, is charged with The assessment of the likelihood and amount of income tax benefits, maintaining state-of-the-art knowledge of tax accounting developments as well as the timing of realization of such amounts, can materially affect and the implementation of such relevant measures, as required. the determination of net income or cash flows. As noted in Section 1.5 The transactions of the Company are under continual review by the Financial and operating targets for 2011, TELUS currently expects to make Company’s Taxation department whereby transactions of an unusual or cash income tax payments, net of recoveries, of approximately $130 to non-recurring nature, in particular, are assessed from multiple risk-based $180 million. The 2011 blended statutory income tax rate is expected to perspectives. Tax-related transaction risks are regularly communicated be 26.5 to 27.5%. These expectations can change as a result of changes to and reassessed by tax counsel as a check to initial exposure assess- in interpretations, regulations, legislation or jurisprudence. ments. As a matter of regular practice, large and international transactions The timing concerning the monetization or realization of future income are reviewed by external tax counsel, while other third-party advisors tax accounts is uncertain, as it is dependent on future earnings of TELUS may also be engaged to express their view as to the potential for tax and other events. The amounts of future income tax liabilities are also exigibility. In 2010, the Company completed phase one of its three-phase uncertain, as the amounts are based upon substantively enacted enterprise-wide program to review its existing international structure, future income tax rates in effect at the time, which can be changed by systems and processes and to develop a future mode of operation that governments. The amounts of cash tax payments and future income will mitigate its regulatory, legal and tax risks as it continues international tax liabilities are also based upon the Company’s anticipated mix expansion. Additional adjustments will continue into 2011 to take into of revenues among the jurisdictions in which it operates, which is also account business changes. In 2010, the Company continued to work on subject to change. expanding the capability of its U.S. automated regulatory and tax billing The audit and review activities of the Canada Revenue Agency and system for additional products and services that is expected to be com- other jurisdictions’ tax authorities affect the ultimate determination of pleted in 2011. The Company engages external counsel and advisors as the actual amounts of commodity taxes payable or receivable, income appropriate to provide advice and to prepare or review returns to enable taxes payable or receivable, future income tax liabilities and income the Company to comply with tax laws in the jurisdictions outside of tax expense. Therefore, there can be no assurance that taxes will be Canada in which it has operations of any significance. The advice and payable as anticipated and/or that the amount and timing of receipt or returns provided by such advisors and counsel are reviewed for use of the tax-related assets will be as currently expected. Management’s reasonableness by TELUS’ internal Taxation team. experience indicates the taxation authorities are more aggressively pursuing perceived tax issues and have increased the resources they 10.8 Health, safety and environment put to these efforts. The economic recession that ended in 2009 has Team member health, wellness and safety only served to exacerbate such aggressive practices. Lost work time resulting from the physical injury or psychological In order to provide comprehensive solutions to primarily Canadian- illness of TELUS team members can negatively impact organizational based customers operating in foreign jurisdictions, the Company has productivity and employee benefit costs. entered into further arrangements for the supply of services in such Risk mitigation: To minimize absences in the workplace, TELUS foreign jurisdictions, thus exposing itself to multiple forms of taxation. supports a holistic and proactive approach to team member health by In 2008, the Company continued to expand its activities into providing comprehensive wellness, disability, ergonomic and employee the United States and other foreign jurisdictions including the United assistance programs. To promote safe work practices, the Company Kingdom, Philippines, Panama, Guatemala, El Salvador and Barbados. has long-standing training and orientation programs for team members, In 2009, as part of its operational efficiency program, the Company contractors and suppliers who access TELUS facilities. Wellness increased its offshoring of certain business processes to the Philippines programs include training for managers and access to short-term and and India. In the U.S., federal, state and local jurisdictions have created long-term counselling for individual team members and/or teams. varying complex regimes for income, revenue, sales and use, and However, there can be no assurance that these safety and health property taxes. The number and variation of such regimes in the U.S. programs and practices will be effective in all situations. jurisdictions where the Company has transactions cause additional financial risk to the Company. Generally, each foreign jurisdiction has its Radio frequency emission concerns own taxation peculiarities in the forms of taxation imposed (such as Some studies and various media reports have asserted that radio value-added tax, gross receipts tax or income tax) and its own legislation frequency emissions from wireless handsets may be linked to and tax treaties with Canada, as well as currency and language differ- certain adverse health effects. There can be no assurance that future ences. Notwithstanding the usual differences, the telecommunications health studies, government regulations or public concerns about the industry has unique issues that lead to uncertainty in the application health effects of radio frequency emissions will not have an adverse or division of tax between domestic and foreign jurisdictions. Accordingly, effect on the business and prospects for TELUS. For example, public TELUS’ foreign expansion activities have increased the Company’s concerns could reduce subscriber growth and usage, and increase exposure to tax risks, from both financial and reputation perspectives. costs as a result of modifying handsets, relocating wireless towers, and Risk mitigation: The Company maintains an internal Taxation depart- addressing incremental legal requirements and product liability lawsuits. ment composed of professionals who are trained and educated in taxation TELUS continues to monitor developments in this area. administration and who maintain an up-to-date knowledge base of new Risk mitigation: Evidence in the scientific community, as determined developments in the underlying Canadian law, its interpretations and and published in numerous studies worldwide, supports the conclusion jurisprudence. TELUS also has an experienced international team with that there is no demonstrated public health risk associated with the knowledge of U.S. and other foreign tax laws, supplemented by U.S. use of wireless phones. These include a study published in the Journal

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of the National Cancer Institute in 2006, involving 420,000 cell phone The Company estimates that its emissions in 2010 will be similar users in Denmark. This study found that cell phone users are no more to those in 2009, approximately 320,000 tonnes, with final publication likely than anyone else to suffer a range of cancer types. Government of its emissions to be made in the 2010 CSR report. agencies in Canada responsible for establishing safe limits for signal levels Risk mitigation: TELUS recently announced its climate change of radio devices also support the conclusion that wireless telephones strategy, which includes a mitigation component focusing on energy are not a health risk. TELUS believes that the handsets it sells comply and CO2e reduction, an adaptation component, and an innovation with all applicable Canadian and U.S. government safety standards. component, which helps customers and communities realize their climate change goals through TELUS’ technological and service solutions.

Responsible driving TELUS’ strategic targets are a 25% reduction in CO2e emissions over Research has shown an increase in distraction levels for drivers using 2009 levels by 2020 and a 10% reduction in energy use over the same wireless devices while operating vehicles. All Canadian provinces except period. This is expected to be achieved through network efficiency New Brunswick have passed laws to ban the use of handheld mobile upgrades, real estate transformation and LEED (leadership in energy phones while driving, but do permit the use of hands-free devices. and environmental design) principles certification for construction of Alberta requirements are expected to come into effect by the middle new buildings, in-house technology upgrades, server virtualization, of 2011. There can be no assurance that additional laws against increased use of video-conferencing and teleconferencing, fleet transfor- using mobile phones or hands-free devices while driving will not be mation and employee education. TELUS measures its yearly emissions passed and that, if passed, such laws will not have a negative effect against its targets and actively pursues efficiency strategies to help on subscriber growth rates, usage levels or wireless revenues. reach its goals. Risk mitigation: TELUS promotes responsible driving and recom- mends that driving safely should be every wireless customer’s first Concerns related to electronic waste (e-waste) responsibility. The Company provides and sells hands-free devices TELUS has a responsibility to help ensure that equipment it uses or in its retail channels. sells is dealt with appropriately at the end of its life cycle. Improperly managed e-waste may be sent to landfills and is often sent to developing Concerns related to contaminated property and countries which, due to a lack of disposal regulations, can contribute associated risk to human health or wildlife to environmental and health impacts. To conduct business operations, TELUS owns or leases a large Risk mitigation: TELUS has implemented an e-waste management number of properties. The presence of fuel systems for back-up power program designed to provide approved recycling channels for both its generation enables the provision of reliable service, but also poses an external and internal electronic products. One example is the Recycle My environmental risk for the Company. Spills or releases of fuel from these Cell initiative, where TELUS has partnered with the Canadian Wireless systems have occurred occasionally, with the maximum cost incurred Telecom Association (CWTA) to introduce a national program that links all at any site to date rarely exceeding $1 million. A significant portion of participating recycling programs, making it easier for consumers to know this risk is associated with the clean-up of sites contaminated by historic where and how to dispose of wireless devices. The phones collected TELUS practices or by previous owners. There were no significant through this program are sent to approved Canadian facilities where they changes to TELUS’ environmental risks during 2010. Although TELUS are refurbished and re-used, or recycled. Recycled phones are sent to takes proactive measures to identify and mitigate environmental exposures approved processors to be broken down into usable components for and employs an environmental management system (EMS) based on resale, reducing landfill waste generation. ISO14001:2004, there can be no assurance that specific environmental incidents will not impact TELUS operations in the future. 10.9 Litigation and legal matters Risk mitigation: While TELUS’ environmental risks are considered Investigations, claims and lawsuits immaterial to the Company’s financial results, they are important Given the size of TELUS, investigations, claims and lawsuits seeking from a corporate social responsibility perspective, which TELUS takes damages and other relief are regularly threatened or pending against the seriously. Poor environmental performance or ineffective risk mitigation Company and its subsidiaries. TELUS cannot predict with any certainty could have negative legal, brand or community relations impacts. the outcome of such actions and as such, there can be no assurance The Company’s EMS is designed to proactively identify and prioritize that financial or operating results will not be negatively impacted. these risks. The specific risk posed by fuel systems is being addressed Risk mitigation: The Company believes that it has put in place through a program to install containment and monitoring equipment reasonable policies, processes and awareness designed to enable com- at sites with systems of qualifying size. Further detailed assessment of pliance with legal and contractual obligations and reduce exposure to environmental risks and mitigation activities can be found in the TELUS legal claims. Please also refer to the other risk mitigation steps discussed corporate social responsibility (CSR) report at telus.com/csr. in this subsection.

Concerns related to climate change Class actions TELUS supports the general view of the worldwide scientific community TELUS and certain subsidiaries are defendants in a number of that anthropogenic sources of greenhouse gases, such as carbon certified and uncertified class actions. The Company has observed an dioxide equivalency (CO e), are possibly accelerating the rate of global 2 increased willingness on the part of claimants to launch class actions climate change. The changes related to climate change are a potential whereby a representative plaintiff seeks to pursue a legal claim on risk to TELUS’ business operations including but not limited to the behalf of a large group of persons, and the number of class actions filed Company’s ability to provide telecommunications services to customers. against the Company has continuously increased in recent years. The TELUS’ North American CO e emissions have remained fairly consis- 2 adoption by governments of increasingly stringent consumer protection tent with little variance since it began measuring its CO e output. 2 legislation (such as Quebec’s Bill 60 in 2010) may also increase the

TELUS 2010 annual report . 105 number of class actions. A successful class action lawsuit, by its Civil liability in the secondary market nature, could result in a sizable damage award that negatively affects Like other Canadian public companies, TELUS is subject to civil liability a defendant’s financial or operating results. for misrepresentations in written disclosure and oral statements, and liability for fraud and market manipulation. Legislation creating liability Certified class actions was first introduced in Ontario in 2005. Since then, other provinces Certified class actions against the Company include a class action and territories have adopted similar legislation. brought in 2004 in Saskatchewan against a number of past and present The legislation creates a right of action for damages against TELUS, wireless service providers including TELUS. The claim alleges that its directors and certain of its officers in the event that TELUS, or a each of the carrier defendants is in breach of contract and has violated person with actual, implied or apparent authority to act or speak on competition, trade practices and consumer protection legislation across behalf of TELUS, releases a document or makes a public oral statement Canada in connection with the collection of system access fees, and that contains a misrepresentation, or TELUS fails to make timely seeks to recover direct and punitive damages in an unspecified amount. disclosure of a material change. Similar proceedings were commenced in other provinces. A national The legislation permits action to be taken by any person or company class was certified in September 2007 by the Saskatchewan Court of that acquires or disposes of TELUS securities in the secondary market Queen’s Bench. In February 2008, the same court removed from the class during the period of time that the misrepresentation remains uncorrected all customers of the Company who are bound by an arbitration clause, in the public or, in the case of an omission, until such time as the material applying two decisions of the Supreme Court of Canada. In March 2010, change has been disclosed. It is not necessary for the person or com- the Company obtained leave to appeal the 2007 certification decision pany to establish that they relied on the misrepresentation in making the and that appeal was heard in December 2010 with the court reserving acquisition or disposition. judgement. Certification is a procedural step. If the Company is unsuc- Risk mitigation: When the legislation was first introduced, TELUS cessful on appeal of the certification decision, the plaintiff would still be conducted a review of its disclosure practices and procedures and the required to prove the merits of the claim. extent to which they were documented. As part of that review, TELUS A new class action making substantially the same allegations was consulted external advisors. This review indicated that TELUS has well- brought in 2009 in Saskatchewan. The Company believes this was done documented and fulsome processes in place, including a corporate in an attempt to take advantage of the expanded scope in class action disclosure policy that restricts spokespersons to specifically designated legislation since 2004. The new class action was stayed by the court senior management, provides a protocol for dealing with analysts and in December 2009 upon an application by the defendants to dismiss it oral presentations, outlines the communication approach to issues, for abuse of process, conditional on possible future changes in circum- and has a disclosure committee to review and determine disclosure of stance. In March 2010, the plaintiffs applied for leave to appeal the material information. TELUS monitors legal developments and annually stay decision and that application was adjourned pending the outcome re-evaluates its disclosure practices and procedures, including in 2010, of the 2004 class action. and believes that they continue to be appropriate and prudent and Risk mitigation: Certification of a class action does not determine that its risk exposure is reasonable and has not changed significantly the merits of the claim, and the plaintiffs are still required to prove the over the past 12 months. However, there can be no assurance that merits of their claims. The Company believes that it has good defences TELUS’ processes will be followed by all team members at all times. to these actions and is vigorously defending them. Should the ultimate resolution of these actions differ from management’s assessments Legal compliance and assumptions, a material adjustment to the Company’s financial TELUS relies on its employees, officers, Board of Directors, key suppliers position and the results of its operations could result. and partners to demonstrate reasonable legal and ethical standards. Uncertified class actions Situations might occur where individuals do not adhere to TELUS policies Uncertified class actions against the Company include a 2008 class action or contractual obligations, or where personal information of a TELUS brought in Saskatchewan alleging that, among other things, Canadian customer or employee is inadvertently collected, used or disclosed in a telecommunications carriers including the Company have failed to pro- manner that is not fully compliant with legislation or contractual obliga- vide proper notice of 911 charges to the public and have been deceitfully tions. In addition, there could be cases where compliance programs may passing them off as government charges, as well as a 2008 class action not be fully adhered to or parties may have a different interpretation of brought in Ontario alleging that the Company has misrepresented the requirements of particular legislative provisions. In the case of TELUS its practice of rounding up wireless airtime to the nearest minute and Health Solutions, personal information includes sensitive health infor- charging for the full minute. The plaintiffs in these actions seek direct mation of individuals who are TELUS customers or healthcare providers’ and punitive damages and other relief. The Company is assessing customers. These situations may expose TELUS to litigation and the the merits of these claims, but the potential for liability and magnitude possibility of damages, sanctions and fines, and/or negatively affect of potential loss cannot be readily determined at this time. TELUS’ financial or operating results and reputation. Risk mitigation: The Company is vigorously defending certification In 2010, the Company continued to expand its activities into the of these actions. Certification is a procedural step that determines United States and other countries. When operating in foreign jurisdictions whether a particular lawsuit may be prosecuted by a representative TELUS is required to comply with local laws and regulations, which plaintiff on behalf of a class of individuals. Certification of a class action may differ substantially from Canadian laws and add to the legal and does not determine the merits of the claim, so that if the Company tax exposures the Company faces. were unsuccessful in defeating certification, the plaintiffs would still Risk mitigation: Although management cannot predict outcomes be required to prove the merits of their claims. with certainty, management believes that it has reasonable policies, controls and processes, and awareness in place for proper compliance and that these programs are having a positive effect on reducing risks.

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Since 2002, TELUS has instituted for its employees, officers and directors defendants to settle claims more readily, in part to mitigate those costs. an ethics policy and in 2003, established a toll-free Ethics Line for Both of these factors may incent intellectual property rights holders anonymous reporting by anyone who has issues or complaints. Since to more aggressively pursue infringement claims. 2003, TELUS has had a designated Compliance Officer, whose role Given the vast array of technologies and systems used by TELUS is to work across the enterprise to ensure that the business has the and its affiliates to deliver their products and services, and with the rapid appropriate controls and measurements in place to facilitate legal change and complexity of such technologies, disputes over intellectual compliance. For example, as a proactive measure on privacy compliance, property and proprietary rights can reasonably be expected to increase. TELUS places a control in the project development stage of major As a user of technology, TELUS and its affiliates receive from time to projects by requiring a privacy impact assessment to be performed time communications, ranging from solicitations to demands and legal for all major projects involving the use of customer or team member actions, from third parties claiming ownership rights over intellectual personal information. property used by TELUS and its affiliates and asking them to pay a settle- In 2010, the Company continued to enhance and further test ment or licensing fees for the continued use of such intellectual property. and implement major system capabilities and processes to accommo- There can be no assurance that TELUS and its affiliates will not be faced date regulatory, legal and tax requirements when pursuing opportunities with significant claims based on the alleged infringement of intellectual outside Canada. The Company also continued to advance a program property rights, whether such claims are based on a legitimate dispute to support TELUS’ business plans for limited additional expansion and over the validity of the intellectual property rights or their infringement, service extension outside Canada. In the first phase of that program, or whether such claims are advanced for the primary purpose of TELUS completed its assessment of the Company’s business processes extracting a settlement. TELUS and its affiliates may incur significant and gating controls that strive to ensure that all foreign expansion initia- costs in defending infringement claims, and may suffer significant tives receive appropriate review by regulatory, legal and taxation advisors. damages and lose the right to use technologies that are essential to Such reviews support ongoing compliance with domestic and foreign their operations should any infringement claim prove successful. As regulatory, legal and taxation requirements. In 2010, TELUS received developers of technology, TELUS Health Solutions and TELUS Finance proposals for the second phase to establish a mode of operation to sup- Solutions depend on their ability to protect the proprietary aspects of port compliance with foreign regulatory, legal and taxation requirements. their technology. The failure to do so adequately could materially affect These proposals are now under review. In addition, legal counsels their business. However, policing unauthorized use of TELUS’ intellectual qualified in the relevant foreign jurisdictions are engaged by TELUS’ property may be difficult and costly. subsidiaries to provide legal advice as appropriate. Risk mitigation: While TELUS and its affiliates incorporate many The Compliance Officer reports jointly to the Audit Committee and technologies into their products and services, other than TELUS Health the Senior Vice-President and Chief General Counsel. This dual reporting Solutions and TELUS Finance Solutions, they are not primarily in the provides direct line-of-sight reporting to the Audit Committee to address business of creating or inventing technology. In acquiring products and identified risks. services from suppliers, it is the practice of TELUS and its affiliates to seek and obtain contractual protections consistent with industry practices, Defects in software and failures in data to help mitigate the risks of intellectual property infringements. It is the and transaction processing practice of TELUS Health Solutions and TELUS Finance Solutions to TELUS Health Solutions and TELUS Finance Solutions provide to vigorously protect their intellectual property rights through litigation and their customers certain applications and managed services that involve other means. the processing or storing of data, including sensitive personal health data, and the transfer of large funds. Software defects or failures in data 10.10 Human-caused and natural threats or transaction processing could lead to substantial damage claims. Concerns about natural disasters and intentional For instance, a defect in a TELUS Health Solutions application could lead threats to TELUS’ infrastructure and its Canadian to personal injury, while a failure in transaction processing could result and international business operations in the transfer of funds to the wrong recipient. TELUS is a key provider of critical communications infrastructure Risk mitigation: Management believes that it has put in place reason- in Canada and has certain supporting business functions located in able policies, controls, processes (such as quality assurance programs six other countries. The Company’s network, information technology, in software development procedures) and contractual arrangements physical assets, team members, supply chain and business results (such as disclaimers, indemnities and limitations of liability), as well as may be materially impacted by exogenous threats, including: insurance coverage, to reduce exposure to legal claims. . Natural disasters, seismic and severe weather-related events such as ice, snow and wind storms, flooding, lightning strikes, wildfires, Intellectual property and proprietary rights typhoons/hurricanes, tornadoes and tsunamis Technology evolution also brings additional legal risks and uncertainties. . Intentional threats such as sabotage, terrorism, labour disputes, The intellectual property and proprietary rights of owners and developers and political and civil unrest of hardware, software, business processes and other technologies . Dependence on the provision of service to the Company by other may be protected under statute, such as patent, copyright and indus- infrastructure providers (e.g. power) trial design legislation, or under common law, such as trade secrets. . Public health threats such as pandemics. With the growth and development of technology-based industries, the value of these intellectual property and proprietary rights has increased. The Company recognizes that global climate change may exacerbate Significant damages may be awarded in intellectual property infringe- certain of these threats, including the frequency and severity of ment claims advanced by rights holders. In addition, defendants may incur weather-related events. significant costs to defend such claims and that possibility may prompt

TELUS 2010 annual report . 107 Risk mitigation: TELUS has an extensive ongoing enterprise-wide January 2011 Monetary Report estimated growth of 2.4% for 2011 business continuity program (BCP) with resources dedicated to design, and 2.8% for 2012. Persistent strength in the Canadian dollar continues exercise, maintain, execute and monitor business continuity/disaster to act as a drag on the Canadian economy. In addition, Statistics recovery policies, plans and processes that address a range of scenarios Canada’s December 2010 Labour Force Survey reported an unemploy- and for its key facilities. This approach is focused on supporting TELUS’ ment rate of 7.6%, down from 8.5% in December 2009. Improvement continued ability to serve customers and protect corporate assets, and in employment levels may continue to lag the economic recovery. strives to ensure employee protection and safety by instituting resiliency With recent strength in the Canadian natural resource sector and planning in the Company’s day-to-day business operations. In regard to growth in Asia, growth in Alberta and British Columbia is expected internationally situated business support and outsourcing functions, TELUS to be stronger than in Central Canada. However, some concerns remain has acquired and/or announced expansion of these activities in additional around unemployment rates, the timing and impact of reduced govern- countries in different geographic regions to mitigate the risk of locating ment spending, the impact of increases in interest rates currently expected these functions in one country. TELUS has had a pandemic plan in place from the Bank of Canada later in 2011, and the impact of U.S. and for more than five years. In 2010, pandemic plans were audited, exercised global economic weaknesses. and updated to address the threat and to accommodate key lessons from the 2009 H1N1 influenza outbreak. TELUS continues to monitor the Slow or uneven economic growth may adversely impact TELUS pandemic threat and maintain plans to address it. In addition, TELUS Economic uncertainty may cause residential and business telecommu- continues to sustain ongoing risk mitigation in regards to seismic nications customers to delay new service purchases, reduce volumes upgrades, fire protection, flood prevention and power provisioning. of use, discontinue use of services or seek lower-priced alternatives. Although TELUS has business continuity planning processes in A significant economic downturn or recession could adversely impact place, there can be no assurance that specific events or a combination TELUS’ profitability, free cash flow and bad debt expense, and potentially of events will not materially impact TELUS operations and results. require the Company to record impairments to the carrying value of its assets including, but not limited to, its intangible assets with indefinite Security – Electronic attack lives (spectrum licences) and its goodwill. Impairments to the carrying Electronic attacks are intentional acts to gain unauthorized access value of assets would result in a charge to earnings and a reduction to TELUS information or to prevent legitimate users from gaining access. in owners’ equity, but would not affect cash flow. Such attacks may use a range of techniques, from social engineering Risk mitigation: The Company cannot completely mitigate economic (non-technical intrusion relying heavily on human interaction and trickery risks. TELUS continues to focus on five key diversified vertical business to break normal security procedures) to the use of sophisticated markets: the public sector, healthcare, financial services, energy and software/hardware. telecom wholesale. The public sector, healthcare and financial services Risk mitigation: Using a layered security approach, TELUS has vertical markets are generally expected to be less exposed to economic implemented a number of proactive, reactive and containment processes cycles. TELUS continues to pursue cost reduction and efficiency initia- and systems to safeguard its IT infrastructure, information repositories tives. The Company expects its 2011 capital expenditures to be at a level and information distribution. Security policies and procedures are in place similar to 2010 and approximately 19% lower than in 2009. If necessary, to govern the duties of those responsible for information confidentiality the Company could consider additional cost and efficiency initiatives and integrity. Intrusion detection systems, access controls and incident and lower capital expenditure levels in future years. response procedures are in place to provide continuous monitoring of TELUS’ IT infrastructure. Pension funding Economic and capital market fluctuations could also adversely impact Security – Vandalism and theft the funding and expense associated with the defined benefit pension TELUS has a number of publicly situated physical assets that are subject plans that TELUS sponsors. There can be no assurance that TELUS’ to vandalism and/or theft, including public payphones, copper cable, pension expense and funding of its defined benefit pension plans will and network and telephone switch centres. not increase in the future and thereby negatively impact earnings and/ Risk mitigation: The Company has implemented an array of physical or cash flow. Defined benefit funding risks may occur if total pension and electronic barriers, controls and monitoring systems to protect liabilities exceed the total value of the respective trust funds. Unfunded its assets, considering such factors as asset importance, exposure risks differences may arise from lower than expected investment returns, and potential costs incurred should a particular asset be damaged or reductions in the discount rate used to value pension liabilities, and stolen. As an additional level of risk management, TELUS has a corporate actuarial loss experiences. security group that continually investigates and evaluates the risks and, Risk mitigation: TELUS seeks to mitigate this risk through the appli- in co-operation with law enforcement and other external agencies, cation of policies and procedures designed to control investment risk and adjusts its level of protection to meet changing risks. ongoing monitoring of its funding position. Pension expense and funding While TELUS has IT and network security planning processes, for 2011 have been largely determined by the rates of return on the plans’ and thorough physical asset security planning processes, there can assets for 2010 and interest rates at year-end 2010. Under IFRS, TELUS’ be no assurance that specific events will not materially impact TELUS actuarial gains and losses for defined benefit plans are charged to Other operations and results. comprehensive income, partly contributing to an estimated pension recovery of approximately $34 million in 2011, as compared to a pension 10.11 Economic growth and fluctuations expense of $28 million in 2010 as currently reported under Canadian Economic growth in Canada was estimated to be 2.9% in 2010, supported GAAP. The Company’s best estimate of cash contributions to its defined by monetary and fiscal stimulus, after the economy emerged from a benefit pension plans in 2011, including a $200 million voluntary special year-long recession in the third quarter of 2009. The Bank of Canada’s contribution in January 2011, is $298 million ($137 million in 2010).

108 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 11

DEFINITIONS AND RECONCILIATIONS Definitions of operating, liquidity and capital resource measures, including calculation 11 and reconciliation of certain non-GAAP measures used by management

The discussion in this section is qualified in its entirety by the Caution Calculation of EBITDA regarding forward-looking statements at the beginning of the MD&A. Unaudited IFRS-based financial information provided in this section is subject pro forma As currently reported to change, as described further in Section 8.2 Accounting policy Years ended December 31 IFRS-IASB ($ millions) 2010 2010 2009 developments. Net income 1,052 1,038 1,002 Financing costs 522 510 532 11.1 Earnings before interest, taxes, depreciation Income taxes 335 328 203 and amortization (EBITDA) Depreciation 1,339 1,333 1,341 EBITDA is not a calculation based on Canadian GAAP, IFRS-IASB Amortization of intangible assets 402 402 381 or U.S. GAAP. EBITDA should not be considered an alternative to Net Impairment losses (reversals) income in measuring the Company’s performance, nor should it be for capital assets – – – used as an exclusive measure of cash flow. TELUS has issued guidance Standardized EBITDA on and reports EBITDA because it is a key measure that management (CICA guideline) 3,650 3,611 3,459 uses to evaluate performance of segments and the Company. EBITDA – Other expense, net 32 32 excluding restructuring costs is also utilized in measuring compliance with debt covenants (see description in Section 11.4). EBITDA is a mea- EBITDA (management’s definition) 3,643 3,491 sure commonly reported and widely used by investors as an indicator pro of a company’s operating performance and ability to incur and service As EBITDA is often used as a valuation metric, an analysis of the forma debt, and as a valuation metric. While EBITDA has been disclosed difference in EBITDA arising from the transition to IFRS is presented herein to permit a more complete comparative analysis of the Company’s in the following table. The effects of transition on individual line items on operating performance and debt servicing ability relative to other the Consolidated statement of income and other comprehensive income Section 8.2.3 companies, investors are cautioned that EBITDA as reported by TELUS are presented in more detail in . may not be comparable in all instances to EBITDA as reported by other companies. Analysis of the difference in management’s After changeover to IFRS, management intends to present standard- definition of EBITDA following the transition to IFRS ized EBITDA (CICA guideline) in its disclosures, and may periodically Year ended December 31 ($ millions) 2010 also calculate an adjusted EBITDA that will exclude items of an unusual EBITDA (as currently reported) 3,643 nature that do not reflect normal or ongoing telecommunications oper- IFRS recognition, measurement, presentation ations, that should not be considered in a valuation metric or should not and disclosure effects be included in assessment of ability to service or incur debt. Other operating income (in revenues The CICA’s Canadian Performance Reporting Board defined rather than Other expense, net) 2 standardized EBITDA to foster comparability of the measure between Charitable donations expense entities. Standardized EBITDA is an indication of an entity’s capacity (in Operating expenses rather than Other expense, net) (26) to generate income from operations before taking into account manage- Employee benefits – defined benefit plans 39 ment’s financing decisions and costs of consuming tangible and Leasing – sales and leaseback transactions (12) intangible capital assets, which vary according to their vintage, tech- Asset retirement obligations 4 nological currency and management’s estimate of their useful life. EBITDA (unaudited pro forma IFRS-IASB) 3,650 Accordingly, standardized EBITDA comprises revenue less operating costs before interest expense, capital asset amortization and Management also calculates EBITDA less capital expenditures impairment charges, and income taxes. Management’s definition as a simple proxy for cash flow at a consolidated level and in its two of EBITDA differs from standardized EBITDA, as illustrated below: reportable segments. EBITDA less capital expenditures may be used for comparison to the reported results for other telecommunications companies over time and is subject to the potential comparability issues of EBITDA described above.

TELUS 2010 annual report . 109 Calculation of EBITDA less capital expenditures The CICA’s Canadian Performance Reporting Board defined standardized free cash flow to foster comparability of the measure

Unaudited between entities. Standardized free cash flow is an indication of pro forma As currently reported Years ended December 31 IFRS-IASB the entity’s capacity to generate discretionary cash from operations, ($ millions) 2010 2010 2009 comprising cash flows from operating activities less net capital expen- EBITDA 3,650 3,643 3,491 ditures and those dividends that are more representative of interest Capital expenditures (1,721) (1,721) (2,103) costs. It does not necessarily represent the cash flow in the period available for management to use at its discretion, which may be affected 1,929 1,922 1,388 by other sources and non-discretionary uses of cash. The following reconciles management’s definition of free cash flow with standardized 11.2 Free cash flow free cash flow and Cash provided by operating activities. Free cash flow is not a calculation based on Canadian GAAP, IFRS-IASB or U.S. GAAP and should not be considered an alternative to the Con- Free cash flow reconciliation As currently reported solidated statements of cash flows. TELUS reports free cash flow because Years ended December 31 it is a key measure used by management to evaluate the Company’s ($ millions) 2010 2009 performance. Free cash flow excludes certain working capital changes Cash provided by operating activities 2,546 2,904 and other sources and uses of cash, as found in the Consolidated Deduct stipulated dividends n.a. n.a. statements of cash flows. Free cash flow can be used to gauge TELUS’ Deduct capital expenditures (1,721) (2,103) performance over time. Investors are cautioned that free cash flow as Proceeds from disposition of capital assets 1 – reported by TELUS may not be comparable in all instances to free cash Standardized free cash flow flow as reported by other companies, and differs from standardized (CICA guideline) 826 801 free cash flow defined by the CICA. Management’s definition of free cash Other (line item in cash provided flow provides an indication of how much cash generated by operations by operating activities) 41 (23) is available after capital expenditures, but before dividends, acquisitions, Reduction (increase) in securitized proceeds from divested assets and changes in certain working capital accounts receivable 100 (200) items (such as trade receivables and trade payables). Other net changes in non-cash operating working capital (20) (93) Calculation of free cash flow Proceeds from disposition of capital assets (1) –

Free cash flow (management’s definition) 947 485 Unaudited pro forma As currently reported Years ended December 31 IFRS-IASB ($ millions) 2010 2010 2009 11.3 Definitions of wireless operating indicators These measures are industry metrics and are useful in assessing the EBITDA (see Section 11.1) 3,650 3,643 3,491 operating performance of a wireless company. Deduct donations and securitization fees included Average revenue per subscriber unit per month (ARPU) in Other expense, net, is calculated as Network revenue divided by the average number of as currently reported n.a. (33) (25) subscriber units on the network during the period and expressed as a Items from the consolidated rate per month. Data ARPU is a component of ARPU, calculated on the statements of cash flows: same basis for revenue derived from services such as text messaging, Share-based compensation (30) (30) (23) mobile computing, personal digital assistance devices, Internet browser Net employee defined benefit plans expense activity and pay-per-use downloads. (recovery) (8) 31 20 Churn per month is calculated as the number of subscriber units Employer contributions disconnected during a given period divided by the average number of to employee defined subscriber units on the network during the period, and expressed as benefit plans (140) (140) (180) a rate per month. A prepaid subscriber is disconnected when the sub- Restructuring costs net of cash payments (24) (24) 84 scriber has no usage for 90 days following expiry of the prepaid card. Cash interest paid (includes Cost of acquisition (COA) consists of the total of handset subsidies, securitization fees commissions, and advertising and promotion expenses related to the under IFRS) (479) (471) (567) initial subscriber acquisition during a given period. As defined, COA Cash interest received 3 3 54 excludes costs to retain existing subscribers (retention spend). Income taxes refunded (paid), net (311) (311) (266) COA per gross subscriber addition is calculated as cost of Capital expenditures (1,721) (1,721) (2,103) acquisition divided by gross subscriber activations during the period. Free cash flow Retention spend to Network revenue represents direct costs (management’s definition) 940 947 485 associated with marketing and promotional efforts aimed at the retention of the existing subscriber base divided by Network revenue.

110 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS: 11

Smartphones are advanced mobile devices or personal digital Earnings coverage is defined in the Canadian Securities assistants (PDAs) that provide text messaging, email, multimedia down- Administrators’ National Instrument (NI) 41-101 and related instruments. loads and social networking (e.g. Facebook Mobile) functionalities in Prior to the changeover to IFRS, the calculation prescribed the use addition to voice. TELUS reports smartphones as a percentage of gross of gross interest expense on long-term debt; after the changeover to postpaid subscriber additions and as a percentage of the postpaid IFRS, the calculation prescribes the use of total gross interest expense. subscriber base. Calculation of earnings coverage

11.4 Definition and calculation of liquidity Unaudited and capital resource measures pro forma As currently reported Dividend payout ratio and dividend payout ratio of adjusted Years ended December 31 IFRS-IASB ($ millions, except ratio) 2010 2010 2009 net earnings: The basic measure is defined as the quarterly dividend declared per Common Share and Non-Voting Share, as recorded Net income attributable to Common Shares on the financial statements, multiplied by four and divided by the sum and Non-Voting Shares 1,048 – – of basic earnings per share for the most recent four quarters for interim Net income – 1,038 1,002 reporting periods (divided by annual basic earnings per share for fiscal Income taxes 335 328 203 years). The target guideline for the annual dividend payout ratio is on Gross interest expense a prospective basis, rather than on a trailing basis, and is 55 to 65% of Interest on long-term debt 442 442 474 sustainable net earnings. More representative of a sustainable calculation Interest on short-term is the historical ratio based on reported earnings per share adjusted to obligations and other 29 Excluded(1) Excluded(1) exclude income tax-related adjustments, loss on redemption of debt, Loss on redemption of debt 52 52 99 and ongoing impacts of a net-cash settlement feature introduced in 2007. Interest accretion on asset retirement obligations 4 n.a. n.a. Calculation of dividend payout ratios Numerator 1,916 1,860 1,778 Denominator – Unaudited Gross interest expense 527 494 573 pro forma As currently reported Measure for December 31 IFRS-IASB Ratio (times) 3.6 3.8 3.1 ($, except ratios) 2010 2010 2009

Dividend payout ratio (1) Interest on short-term obligations and other was $21 million in 2010 and $9 million in 2009. Numerator – Annualized fourth quarter dividend declared EBITDA – excluding restructuring costs is defined as EBITDA per Common Share and (described in Section 11.1), adding back restructuring costs of $74 million Non-Voting Share 2.10 2.10 1.90 in 2010 and $190 million in 2009. This measure is used in the calculation Denominator – Earnings of Net debt to EBITDA – excluding restructuring costs and EBITDA – per Common Share and excluding restructuring costs interest coverage, consistent with the Non-Voting Share 3.27 3.23 3.14 calculation of the Leverage Ratio and the Coverage Ratio in credit facility Ratio (%) 64 65 61 covenants. Dividend payout ratio EBITDA – excluding restructuring costs interest coverage is of adjusted net earnings Numerator – Annualized fourth calculated on a 12-month trailing basis and defined as EBITDA excluding quarter dividend declared restructuring costs, divided by Net interest cost. Historically, this measure per Common Share and is substantially the same as the Coverage Ratio covenant in TELUS’ Non-Voting Share 2.10 2.10 1.90 credit facilities.

Adjusted net earnings ($ millions) Net debt is a non-GAAP measure whose nearest GAAP measure Net income attributable to is Long-term debt, including Current maturities of long-term debt, as Common Shares and reconciled below. Net debt is one component of a ratio used to deter- Non-Voting Shares 1,048 1,034 998 mine compliance with debt covenants (refer to the description of Deduct favourable income Net debt to EBITDA below). The measurement of net debt is currently tax-related adjustments (30) (30) (165) Add back loss on unaffected by the changeover to IFRS. redemption of debt 37 37 69 Net-cash settlement feature (7) (7) 1 1,048 1,034 903 Denominator – Adjusted net earnings per Common Share and Non-Voting Share 3.27 3.23 2.84

Adjusted ratio (%) 64 65 67

TELUS 2010 annual report . 111 Calculation of Net debt Net debt to EBITDA – excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing Unaudited pro forma IFRS-IASB As currently reported EBITDA – excluding restructuring costs. TELUS’ long-term guideline range

Dec. 31, Jan. 1, Dec. 31, Dec. 31, for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt As at ($ millions) 2010 2010 2010 2009 to EBITDA – excluding restructuring costs is substantially the same as Long-term debt including the Leverage Ratio covenant in TELUS’ credit facilities. current portion 6,056 6,172 6,056 6,172 Net debt to total capitalization provides a measure of the Debt issuance costs netted proportion of debt used in the Company’s capital structure. against long-term debt 28 30 28 30 Derivative liability 404 721 404 721 Net interest cost is defined as Financing costs before gains on Accumulated other compre- redemption and repayment of debt, calculated on a 12-month trailing hensive income amounts basis. No gains on redemption and repayment of debt were recorded arising from financial in the respective periods. Losses recorded on the redemption of long- instruments used to term debt are included in net interest cost. Net interest costs for the manage interest rate and currency risks associated years ended December 31, 2010 and 2009 are equivalent to Financing with U.S. dollar denomi- costs reported for those periods, as currently reported and for nated debt (excluding unaudited pro forma IFRS-IASB results. tax effects) (2) (70) (2) (70) Total capitalization – book value is calculated as Net debt plus Cash and temporary Owners’ equity, excluding accumulated other comprehensive income or investments (17) (41) (17) (41) Proceeds from securitized loss. The transition to IFRS results in differences in Owners’ equity from accounts receivable the amounts currently reported. derecognized in Calculation of total capitalization accounts receivable n.a. n.a. 400 500 Short-term borrowings Unaudited pro forma (proceeds from securitized IFRS-IASB As currently reported accounts receivable) 400 500 n.a. n.a. Dec. 31, Jan. 1, Dec. 31, Dec. 31, Net debt 6,869 7,312 6,869 7,312 As at ($ millions) 2010 2010 2010 2009 Net debt 6,869 7,312 6,869 7,312 The derivative liability in the table above relates to cross currency Owners’ equity interest rate swaps that effectively convert principal repayments and Common Share and Non- interest obligations to Canadian dollar obligations, and is in respect of the Voting Share equity 7,759 7,334 8,179 7,554 U.S.$741 million debenture as at December 31, 2010 (U.S.$1,348 million Add back at December 31, 2009) that matures June 1, 2011. Management believes Accumulated other that Net debt is a useful measure because it incorporates the exchange comprehensive loss 213 53 18 72 rate impact of cross currency swaps put into place that fix the value Non-controlling interests 22 21 22 21 of U.S. dollar debt and because it represents the amount of long-term Total capitalization debt obligations that are not covered by available cash and temporary – book value 14,863 14,720 15,088 14,959 investments.

112 . TELUS 2010 annual report FINANCIALFINANCIAL STATEMENTS STATEMENTS & NOTES: & NOTES X

MANAGEMENT’S REPORT

Management is responsible to the Board of Directors for the preparation Consolidated financial statements contained in this report were being of the Consolidated financial statements of the Company and its sub- prepared. In addition, the Chief Executive Officer and the Chief Financial sidiaries. These financial statements have been prepared in accordance Officer have also evaluated the design and operating effectiveness of with Canadian generally accepted accounting principles and necessarily the Company’s internal control over financial reporting as explained in the include some amounts based on estimates and judgements. following report entitled Report of Management on Internal Control over The Company maintains a system of internal controls that provides Financial Reporting. management with reasonable assurance that assets are safeguarded The Board of Directors has reviewed and approved these and that reliable financial records are maintained. This system includes Consolidated financial statements. To assist the Board in meeting its written policies and procedures, an organizational structure that seg- oversight responsibilities, it has appointed an Audit Committee, which regates duties and a comprehensive program of periodic audits by the is comprised entirely of independent directors. All the members of internal auditors. The Company has also instituted policies and guide- the committee are financially literate and the Chair of the committee has lines that require TELUS team members (including Board members and financial expertise and meets the applicable securities law requirements Company employees) to maintain the highest ethical standards, and has as a financial expert. The committee oversees the Company’s accounting established mechanisms for the reporting to the Audit Committee of and financial reporting, internal controls and disclosure controls, legal accounting and ethics policy complaints. In addition, the Chief Compliance and regulatory compliance, ethics policy and timeliness of filings with Officer works to ensure the Company has appropriate policies, controls regulatory authorities, independence and performance of the Company’s and measurements in place to facilitate compliance with all legal and external and internal auditors, management of the Company’s risks, its regulatory requirements. Annually, the Company performs an extensive creditworthiness, treasury plans and financial policy, and whistleblower risk assessment process (updated quarterly), which includes interviews and accounting and ethics complaint procedures. The committee meets with senior management, a web-enabled risk and control assessment no less than quarterly and, as a standard feature of regularly scheduled survey distributed to a large sample of employees, a survey of the meetings, holds an in-camera session with the external auditors and TELUS Board and input from the Company’s strategic planning activities. separately has the opportunity to meet with the internal auditor without Included in this process are the identification and prioritization of key other management, including management directors, present. It over- enterprise risks, the assessment of risk appetite and tolerance by risk sees the work of the external auditors and approves the annual audit plan. category, and the assessment of the perceptions of the strength of It also receives reports on the external auditor’s internal quality control the internal control environment. Results of this process influence the procedures and independence. Furthermore, the Audit Committee reviews: development of the internal audit program, which is reviewed with the Company’s major accounting policies including alternatives and and approved by the Audit Committee. Key enterprise-wide risks are potential key management estimates and judgements; the Company’s assigned to executive owners for risk mitigation responsibility. financial policies and compliance with such policies; the evaluation by As required by Canadian securities regulations and the United the internal auditors of management’s internal control systems; and the States Sarbanes-Oxley Act, the Company has an effective and efficient evaluation by management of the adequacy and effectiveness of the Sarbanes-Oxley certification enablement process. In addition to assess- design and operation of the Company’s disclosure controls and internal ing disclosure controls and procedures and internal control over financial controls over financial reporting. The Audit Committee also considers reporting, this process cascades informative certifications from the reports on the Company’s business continuity and disaster recovery key stakeholders, which are reviewed by the Chief Executive Officer plan; reports on financial risk management including derivatives exposure and the Chief Financial Officer as part of their due diligence process. and policies; tax planning, environmental, health and safety risk man- The Company performs an annual fraud risk assessment that further agement, corporate social responsibility and management’s approach for informs their assessment of the internal control environment. safeguarding corporate assets; an annual review of the Chair of Board The Company has a formal policy on Corporate Disclosure and of Directors, Chief Executive Officer and Executive Leadership Team Confidentiality of Information, which sets out policies and practices expenses and their use of corporate assets; and regularly reviews mate- including the mandate of the Disclosure Committee. rial capital expenditure initiatives. The committee pre-approves all audit, The Chief Executive Officer and the Chief Financial Officer have audit-related and non-audit services provided to the Company by the evaluated the effectiveness of the Company’s disclosure controls and external auditor (and its affiliates). The committee’s terms of reference procedures related to the preparation of the Management’s discus- are available, on request, to shareholders and at telus.com/governance. sion and analysis and the Consolidated financial statements, as well as other information contained in this report. They have concluded that the Company’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that material information Robert G. McFarlane Darren Entwistle relating to the Company and its consolidated subsidiaries would be Executive Vice-President President made known to them by others within those entities, particularly during and Chief Financial Officer and Chief Executive Officer the period in which the Management’s discussion and analysis and the February 24, 2011 February 24, 2011

TELUS 2010 annual report . 113 REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of TELUS Corporation (TELUS) is responsible for may become inadequate because of changes in conditions, or that the establishing and maintaining adequate internal control over financial degree of compliance with the policies or procedures may deteriorate. reporting and for its assessment of the effectiveness of internal Based on this assessment, management has determined that the control over financial reporting. Company’s internal control over financial reporting is effective as of TELUS’ Chief Executive Officer and Chief Financial Officer have December 31, 2010. In connection with this assessment, no material assessed the effectiveness of the Company’s internal control over finan- weaknesses in the Company’s internal control over financial reporting cial reporting as of December 31, 2010, in accordance with the criteria were identified by management as of December 31, 2010. established in Internal Control – Integrated Framework issued by the Deloitte & Touche LLP, the Company’s Independent Registered Committee of Sponsoring Organizations of the Treadway Commission Chartered Accountants, audited the Company’s Consolidated financial (COSO). Internal control over financial reporting is a process designed by, statements for the year ended December 31, 2010, and as stated in the or under the supervision of, the President and Chief Executive Officer Report of Independent Registered Chartered Accountants, they have (CEO) and the Executive Vice-President and Chief Financial Officer (CFO) expressed an unqualified opinion on the effectiveness of the Company’s and effected by the Board of Directors, management and other personnel internal control over financial reporting as of December 31, 2010. to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Due to its inherent limitations, internal control over financial reporting Robert G. McFarlane Darren Entwistle may not prevent or detect misstatements on a timely basis. Also, pro- Executive Vice-President President jections of any evaluation of the effectiveness of internal control over and Chief Financial Officer and Chief Executive Officer financial reporting to future periods are subject to the risk that the controls February 24, 2011 February 24, 2011

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of TELUS Corporation In making those risk assessments, the auditor considers internal control We have audited the accompanying consolidated financial statements relevant to the entity’s preparation and fair presentation of the consoli- of TELUS Corporation and subsidiaries (the Company), which comprise dated financial statements in order to design audit procedures that the consolidated statement of financial position as at December 31, 2010 are appropriate in the circumstances. An audit also includes evaluating and 2009, and the consolidated statements of income and other com- the appropriateness of accounting policies used and the reasonableness prehensive income, changes in owners’ equity and cash flows for the of accounting estimates made by management, as well as evaluating years then ended, and a summary of significant accounting policies and the overall presentation of the consolidated financial statements. other explanatory information. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Management’s Responsibility for the Consolidated Financial Statements Opinion Management is responsible for the preparation and fair presentation In our opinion, the consolidated financial statements present fairly, in of these consolidated financial statements in accordance with Canadian all material respects, the financial position of TELUS Corporation and generally accepted accounting principles, and for such internal control subsidiaries as at December 31, 2010 and 2009, and the results of their as management determines is necessary to enable the preparation of operations and their cash flows for each of the years then ended in consolidated financial statements that are free from material misstatement, accordance with Canadian generally accepted accounting principles. whether due to fraud or error. Other Matter Auditors’ Responsibility We have also audited, in accordance with the standards of the Public Our responsibility is to express an opinion on these consolidated Company Accounting Oversight Board (United States), the Company’s financial statements based on our audits. We conducted our audits in internal control over financial reporting as at December 31, 2010, based accordance with Canadian generally accepted auditing standards and on the criteria established in Internal Control – Integrated Framework the standards of the Public Company Accounting Oversight Board issued by the Committee of Sponsoring Organizations of the Treadway (United States). Those standards require that we comply with ethical Commission and our report dated February 24, 2011, expressed an unquali- requirements and plan and perform the audit to obtain reasonable fied opinion on the Company’s internal control over financial reporting. assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial state- Deloitte & Touche LLP ments. The procedures selected depend on the auditor’s judgement, Independent Registered Chartered Accountants including the assessment of the risks of material misstatement of Vancouver, Canada the consolidated financial statements, whether due to fraud or error. February 24, 2011

114 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of TELUS Corporation (2) provide reasonable assurance that transactions are recorded as We have audited the internal control over financial reporting of TELUS necessary to permit preparation of financial statements in accordance Corporation and subsidiaries (the Company) as of December 31, 2010, with generally accepted accounting principles, and that receipts and based on the criteria established in Internal Control – Integrated expenditures of the company are being made only in accordance with Framework issued by the Committee of Sponsoring Organizations of authorizations of management and directors of the company; and the Treadway Commission. The Company’s management is responsible (3) provide reasonable assurance regarding prevention or timely detec- for maintaining effective internal control over financial reporting and tion of unauthorized acquisition, use, or disposition of the company’s for its assessment of the effectiveness of internal control over financial assets that could have a material effect on the financial statements. reporting, included in the accompanying Report of Management on Because of the inherent limitations of internal control over financial Internal Control over Financial Reporting. Our responsibility is to express reporting, including the possibility of collusion or improper management an opinion on the Company’s internal control over financial reporting override of controls, material misstatements due to error or fraud may based on our audit. not be prevented or detected on a timely basis. Also, projections of We conducted our audit in accordance with the standards of the Public any evaluation of the effectiveness of the internal control over financial Company Accounting Oversight Board (United States). Those standards reporting to future periods are subject to the risk that the controls may require that we plan and perform the audit to obtain reasonable assur- become inadequate because of changes in conditions, or that the ance about whether effective internal control over financial reporting degree of compliance with the policies or procedures may deteriorate. was maintained in all material respects. Our audit included obtaining an In our opinion, the Company maintained, in all material respects, understanding of internal control over financial reporting, assessing the effective internal control over financial reporting as of December 31, 2010, risk that a material weakness exists, testing and evaluating the design based on the criteria established in Internal Control – Integrated and operating effectiveness of internal control based on the assessed Framework issued by the Committee of Sponsoring Organizations risk, and performing such other procedures as we considered necessary of the Treadway Commission. in the circumstances. We believe that our audit provides a reasonable We have also audited, in accordance with Canadian generally basis for our opinion. accepted auditing standards and the standards of the Public Company A company’s internal control over financial reporting is a process Accounting Oversight Board (United States), the consolidated financial designed by, or under the supervision of, the company’s principal statements as at and for the year ended December 31, 2010, of executive and principal financial officers, or persons performing similar the Company and our report dated February 24, 2011, expressed an functions, and effected by the company’s board of directors, manage- unqualified opinion on those financial statements. ment, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial Deloitte & Touche LLP reporting includes those policies and procedures that (1) pertain to the Independent Registered Chartered Accountants maintenance of records that, in reasonable detail, accurately and fairly Vancouver, Canada reflect the transactions and dispositions of the assets of the company; February 24, 2011

TELUS 2010 annual report . 115 CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

Years ended December 31 (millions except per share amounts) Note 2010 2009 Operating Revenues 21(a) $ß9,779 $ß9,606 Operating Expenses Operations 6,062 5,925 Restructuring costs 7 74 190 Depreciation 1,333 1,341 Amortization of intangible assets 402 381 7,871 7,837 Operating Income 1,908 1,769 Other expense, net 32 32 Financing costs 8 510 532 Income Before Income Taxes 1,366 1,205 Income taxes 9 328 203 Net Income 1,038 1,002 Other Comprehensive Income 19(b) Change in unrealized fair value of derivatives designated as cash flow hedges 54 69 Foreign currency translation adjustment arising from translating financial statements of self-sustaining foreign operations – (12) Change in unrealized fair value of available-for-sale financial assets – 1 54 58 Comprehensive Income $ß1,092 $ß1,060 Net Income Attributable to: Common Shares and Non-Voting Shares $ß1,034 $ 998 Non-controlling interests 4 4 $ß1,038 $ß1,002 Total Comprehensive Income Attributable to: Common Shares and Non-Voting Shares $ß1,088 $ß1,056 Non-controlling interests 4 4 $ß1,092 $ß1,060 Net Income Per Common Share and Non-Voting Share 10 Basic $ß 3.23 $ß 3.14 Diluted $ß 3.22 $ß 3.14 Dividends Declared Per Common Share and Non-Voting Share 11 $ß 2.00 $ß 1.90 Total Weighted Average Common Shares and Non-Voting Shares Outstanding Basic 320 318 Diluted 321 318

The accompanying notes are an integral part of these consolidated financial statements.

116 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at December 31 (millions) Note 2010 2009 Assets Current assets Cash and temporary investments, net $ 17 $ 41 Accounts receivable 14, 21(b) 917 694 Income and other taxes receivable 56 16 Inventories 21(b) 283 270 Prepaid expenses 113 105 Derivative assets 5(h) 4 1 1,390 1,127 Non-current assets Property, plant and equipment, net 15 7,722 7,729 Intangible assets, net 16 5,134 5,148 Goodwill, net 16 3,572 3,572 Other long-term assets 21(b) 1,744 1,602 Investments 37 41 18,209 18,092 $ß19,599 $ß19,219

Liabilities and Owners’ Equity Current liabilities Accounts payable and accrued liabilities 21(b) $ß 1,495 $ß 1,385 Income and other taxes payable 6 182 Restructuring accounts payable and accrued liabilities 7 111 135 Dividends payable 169 150 Advance billings and customer deposits 21(b) 658 674 Current maturities of long-term debt 18 743 82 Current portion of derivative liabilities 5(h) 419 62 Current portion of future income taxes 348 294 3,949 2,964 Non-current liabilities Long-term debt 18 5,313 6,090 Other long-term liabilities 21(b) 638 1,271 Future income taxes 1,498 1,319 7,449 8,680 Total liabilities 11,398 11,644 Owners’ equity Common Share and Non-Voting Share equity 19 8,179 7,554 Non-controlling interests 22 21 8,201 7,575 $ß19,599 $ß19,219 Commitments and Contingent Liabilities 20

The accompanying notes are an integral part of these consolidated financial statements.

Approved by the Directors:

Brian F. MacNeill Brian A. Canfield Director Director TELUS 2010 annual report . 117 CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY

Common Share and Non-Voting Share equity

Equity contributed

Share capital Accumulated Common Shares Non-Voting Shares other Contributed Retained comprehensive Non-controlling ($ in millions) Note Number of shares Share capital Number of shares Share capital Tot a l surplus earnings income Tot a l interests Tot a l Balance as at January 1, 2009 174,817,514 $ß2,216 142,831,858 $ß3,069 $ß5,285 $ß168 $ß1,762 $ß(130) $ß7,085 $ß23 $ß7,108 Net income – – – – – – 998 – 998 4 1,002 Other comprehensive income – – – – – – – 58 58 – 58 Dividends 11(a) – – – – – – (601) – (601) (6) (607) Dividend Reinvestment and Share Purchase Plan 11(b) – optional cash payments – – 4,512 – – – – – – – – Share option award expense recognized in period 12 – – – – – 13 – – 13 – 13 Shares issued pursuant to cash exercise of share options 19(c) 1,506 – 23,984 1 1 – – – 1 – 1 Shares issued pursuant to use of share option award net-equity settlement feature 19(c) – – 15,162 – – – – – – – – Balance as at December 31, 2009 174,819,020 $ß2,216 142,875,516 $ß3,070 $ß5,286 $ß181 $ß2,159 $ß (72) $ß7,554 $ß21 $ß7,575 Balance as at January 1, 2010 174,819,020 $ß2,216 142,875,516 $ß3,070 $ß5,286 $ß181 $ß2,159 $ß (72) $ß7,554 $ß21 $ß7,575 Net income – – – – – – 1,034 – 1,034 4 1,038 Other comprehensive income – – – – – – – 54 54 – 54 Dividends 11(a) – – – – – – (642) – (642) (3) (645) Dividend Reinvestment and Share Purchase Plan 11(b) – dividends reinvested in shares – – 4,091,865 150 150 – – – 150 – 150 – optional cash payments – – 31,565 1 1 – – – 1 – 1 Share option award expense recognized in period 12 – – – – – 11 – – 11 – 11 Shares issued pursuant to cash exercise of share options 19(c) 96,526 3 372,579 15 18 (1) – – 17 – 17 Shares issued pursuant to use of share option award net-equity settlement feature 19(c) – – 77,061 1 1 (1) – – – – – Balance as at December 31, 2010 174,915,546 $ß2,219 147,448,586 $ß3,237 $ß5,456 $ß190 $ß2,551 $ß (18) $ß8,179 $ß22 $ß8,201

The accompanying notes are an integral part of these consolidated financial statements.

118 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES

Common Share and Non-Voting Share equity

Equity contributed

Share capital Accumulated Common Shares Non-Voting Shares other Contributed Retained comprehensive Non-controlling ($ in millions) Note Number of shares Share capital Number of shares Share capital Tot a l surplus earnings income Tot a l interests Tot a l Balance as at January 1, 2009 174,817,514 $ß2,216 142,831,858 $ß3,069 $ß5,285 $ß168 $ß1,762 $ß(130) $ß7,085 $ß23 $ß7,108 Net income – – – – – – 998 – 998 4 1,002 Other comprehensive income – – – – – – – 58 58 – 58 Dividends 11(a) – – – – – – (601) – (601) (6) (607) Dividend Reinvestment and Share Purchase Plan 11(b) – optional cash payments – – 4,512 – – – – – – – – Share option award expense recognized in period 12 – – – – – 13 – – 13 – 13 Shares issued pursuant to cash exercise of share options 19(c) 1,506 – 23,984 1 1 – – – 1 – 1 Shares issued pursuant to use of share option award net-equity settlement feature 19(c) – – 15,162 – – – – – – – – Balance as at December 31, 2009 174,819,020 $ß2,216 142,875,516 $ß3,070 $ß5,286 $ß181 $ß2,159 $ß (72) $ß7,554 $ß21 $ß7,575 Balance as at January 1, 2010 174,819,020 $ß2,216 142,875,516 $ß3,070 $ß5,286 $ß181 $ß2,159 $ß (72) $ß7,554 $ß21 $ß7,575 Net income – – – – – – 1,034 – 1,034 4 1,038 Other comprehensive income – – – – – – – 54 54 – 54 Dividends 11(a) – – – – – – (642) – (642) (3) (645) Dividend Reinvestment and Share Purchase Plan 11(b) – dividends reinvested in shares – – 4,091,865 150 150 – – – 150 – 150 – optional cash payments – – 31,565 1 1 – – – 1 – 1 Share option award expense recognized in period 12 – – – – – 11 – – 11 – 11 Shares issued pursuant to cash exercise of share options 19(c) 96,526 3 372,579 15 18 (1) – – 17 – 17 Shares issued pursuant to use of share option award net-equity settlement feature 19(c) – – 77,061 1 1 (1) – – – – – Balance as at December 31, 2010 174,915,546 $ß2,219 147,448,586 $ß3,237 $ß5,456 $ß190 $ß2,551 $ß (18) $ß8,179 $ß22 $ß8,201

The accompanying notes are an integral part of these consolidated financial statements.

TELUS 2010 annual report . 119 CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31 (millions) Note 2010 2009 Operating Activities Net income $ß1,038 $ß1,002 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,735 1,722 Future income taxes 213 (83) Share-based compensation 12(a) (30) (23) Net employee defined benefit plans expense 31 20 Employer contributions to employee defined benefit plans (140) (180) Restructuring costs, net of cash payments 7 (24) 84 Other (41) 23 Net change in non-cash working capital 21(c) (236) 339 Cash provided by operating activities 2,546 2,904 Investing Activities Capital expenditures 6, 15, 16 (1,721) (2,103) Acquisitions 16(e) – (26) Proceeds from the sale of property and other assets 10 – Other 4 1 Cash used by investing activities (1,707) (2,128) Financing Activities Common Shares and Non-Voting Shares issued 15 1 Dividends paid to holders of Common Shares and Non-Voting Shares 11(a) (473) (602) Long-term debt issued 18, 21(c) 3,725 9,112 Redemptions and repayment of long-term debt 18, 21(c) (4,127) (9,244) Dividends paid by a subsidiary to non-controlling interests (3) (6) Cash used by financing activities (863) (739) Cash Position Increase (decrease) in cash and temporary investments, net (24) 37 Cash and temporary investments, net, beginning of period 41 4 Cash and temporary investments, net, end of period $ 17 $ 41

Supplemental Disclosure of Cash Flows Interest (paid) 21(c) $ß (471) $ß (567) Interest received $ 3 $ 54 Income taxes (inclusive of Investment Tax Credits) (paid), net 9 $ß (311) $ß (266)

The accompanying notes are an integral part of these consolidated financial statements.

120 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010

TELUS Corporation was incorporated under the Company Act (British Columbia) on October 26, 1998, under the name BCT.TELUS Communications Inc. (BCT). On January 31, 1999, pursuant to a court-approved plan of arrangement under the Canada Business Corporations Act among BCT, BC TELECOM Inc. (BC TELECOM) and the former Alberta-based TELUS Corporation (TC), BCT acquired all of the shares of BC TELECOM and TC in exchange for Common Shares and Non-Voting Shares of BCT. Subsequently on January 31, 1999, BC TELECOM was dissolved. On May 3, 2000, BCT changed its name to TELUS Corporation and in February 2005, the Company transitioned under the Business Corporations Act (British Columbia), successor to the Company Act (British Columbia). TELUS Corporation maintains its registered office at Floor 21, 3777 Kingsway, Burnaby, British Columbia, V5H 3Z7. TELUS Corporation is one of Canada’s largest telecommunications companies, providing a full range of telecommunications products and services. The Company is the largest incumbent telecommunications service provider in Western Canada and provides data, Internet protocol, voice and wireless services to Central and Eastern Canada.

Notes to consolidated financial statements Page Description GENERAL APPLICATION 1. Summary of significant accounting policies 122 Summary review of accounting principles and the methods used in their application by the Company 2. Accounting policy developments 127 Summary review of generally accepted accounting principle developments that do, will, or may, affect the Company 3. Capital structure financial policies 127 Summary review of the Company’s objectives, policies and processes for managing its capital structure 4. Regulation of rates charged to customers 129 Summary review of rate regulation impacts on Company operations and revenues 5. Financial instruments 131 Summary schedules and review of financial instruments, including the management of associated risks and fair values CONSOLIDATED RESULTS OF OPERATIONS FOCUSED 6. Segmented information 138 Summary disclosure of segmented information regularly reported to the Company’s chief operating decision-maker 7. Restructuring costs 139 Summary continuity schedule and review of restructuring costs 8. Financing costs 139 Summary schedule of items comprising financing costs by nature 9. Income taxes 140 Summary reconciliations of statutory rate income tax expense to provision for income taxes and analyses of future income tax liability 10. Per share amounts 141 Summary schedule and review of numerators and denominators used in calculating per share amounts and related disclosures 11. Dividends per share 141 Summary schedule of dividends declared 12. Share-based compensation 142 Summary schedules and review of compensation arising from share option awards, restricted stock units and employee share purchase plan 13. Employee future benefits 145 Summary schedules and review of employee future benefits and related disclosures CONSOLIDATED FINANCIAL POSITION FOCUSED 14. Accounts receivable 151 Summary schedule and review of arm’s-length securitization trust transactions and related disclosures 15. Property, plant and equipment 152 Summary schedule of items comprising property, plant and equipment 16. Intangible assets and goodwill 153 Summary schedule of intangible assets, including goodwill and review of reported fiscal year acquisitions from which goodwill arose 17. Short-term obligations 155 Summary review of bilateral bank facilities 18. Long-term debt 156 Summary schedule of long-term debt and related disclosures 19. Common Share and Non-Voting Share equity 158 Review of Common Share and Non-Voting Share equity items including details of other comprehensive income, accumulated other comprehensive income and share option price stratification 20. Commitments and contingent liabilities 161 Summary review of contingent liabilities, lease obligations, guarantees, claims and lawsuits OTHER 21. Additional financial information 162 Summary schedules of items comprising certain primary financial statement line items 22. Transactions with key management personnel 164 Summary schedules and review of transactions with key management personnel 23. Differences between Canadian and United 164 Summary schedules and review of differences between Canadian and United States States generally accepted accounting principles generally accepted accounting principles as they apply to the Company

TELUS 2010 annual report . 121 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Summary review of accounting principles and the methods used 1 in their application by the Company

The accompanying consolidated financial statements have been . the accruals for Canadian Radio-television and Telecommunications prepared in accordance with accounting principles generally accepted Commission (CRTC) deferral account liabilities; and in Canada and are expressed in Canadian dollars. . certain actuarial and economic assumptions used in determining The terms TELUS or Company are used to mean TELUS Corporation defined benefit pension costs, accrued pension benefit obligations and, where the context of the narrative permits, or requires, its and pension plan assets. subsidiaries. Examples of significant judgements, apart from those involving estimation, include: (a) Consolidation . The Company’s view that substantially all the risks and rewards of The consolidated financial statements include the accounts of the ownership of accounts receivable sold to an arm’s-length securitization Company and all of the Company’s subsidiaries, of which the princi- trust, as discussed further in Note 14, are transferred to the trust. pal one is TELUS Communications Inc. Currently, through the TELUS . The Company’s choice to depreciate and amortize its property, Communications Company partnership and the TELE-MOBILE plant, equipment and intangible assets subject to amortization on COMPANY partnership, TELUS Communications Inc. includes substan- a straight-line basis as it believes that this method better reflects the tially all of the Company’s Wireline segment’s operations and all of the consumption of resources related to the economic lifespan of those Wireless segment’s operations. assets than an accelerated method and is more representative of the Effective January 1, 2009, the Company early adopted the new economic substance of the underlying use of those assets. recommendations for business combinations (Canadian Institute of . The Company’s view that its spectrum licences granted by Industry Chartered Accountants (CICA) Handbook Section 1582), consolidations Canada will likely be renewed by Industry Canada; that the Company (CICA Handbook Section 1601) and non-controlling interests (CICA intends to renew them; and that the Company believes it has the Handbook Section 1602) and did so in accordance with the transitional financial and operational ability to renew them and, thus, they are provisions; the Company would otherwise have been required to deemed to have an indefinite life, as discussed further in Note 16(c). adopt the new recommendations effective January 1, 2011. During the Company’s years ended December 31, 2010 and 2009, it was not signi- (c) Revenue recognition ficantly affected by the early adoption of these recommendations. The Company earns the majority of its revenue (voice local, voice The financing arrangements of the Company and all of its subsidiaries long distance, data (including data and information technology man- do not impose restrictions on inter-corporate dividends. aged services) and wireless network) from access to, and usage of, On a continuing basis, TELUS Corporation reviews its corporate orga- the Company’s telecommunications infrastructure. The majority of the nization and effects changes as appropriate so as to enhance its value. balance of the Company’s revenue (other and wireless equipment) This process can, and does, affect which of the Company’s subsidiaries arises from providing products and services facilitating access to, and are considered principal subsidiaries at any particular point in time. usage of, the Company’s telecommunications infrastructure. The Company offers complete and integrated solutions to meet its (b) Use of estimates and judgements customers’ needs. These solutions may involve the delivery of multiple The preparation of financial statements in conformity with generally services and products occurring at different points in time and/or accepted accounting principles (GAAP) requires management to make over different periods of time. As appropriate, these multiple element estimates, assumptions and judgements that affect: the reported arrangements are separated into their component accounting units, amounts of assets and liabilities at the date of the financial statements; consideration is measured and allocated amongst the accounting units the disclosure of contingent assets and liabilities at the date of the based upon their relative fair values (derived using Company-specific financial statements; and the reported amounts of revenues and objective evidence) and then the Company’s relevant revenue recognition expenses during the reporting period. Actual results could differ from policies are applied to the accounting units. Lease accounting is those estimates. applied to an accounting unit if it conveys the right to use a specific Examples of significant estimates and assumptions include: asset to a customer. . the key economic assumptions used to determine the fair value Multiple contracts with a single customer are normally accounted of residual cash flows arising from accounts receivable securitization; for as separate arrangements. In instances where multiple contracts are . the allowance for doubtful accounts; entered into with a customer in a short period of time, they are reviewed . the allowance for inventory obsolescence; as a group to ensure that, similar to multiple element arrangements, . the estimated useful lives of assets; relative fair values are appropriate. . the recoverability of tangible assets; The Company’s revenues are recorded net of any value-added, . the recoverability of intangible assets with indefinite lives; sales and/or use taxes billed to the customer concurrent with a revenue- . the recoverability of goodwill; producing transaction. . the recoverability of long-term investments; When the Company receives no identifiable, separable benefit for . the amount and composition of income tax assets and income tax consideration given to a customer (e.g. discounts and rebates), the con- liabilities, including the amount of unrecognized tax benefits; sideration is recorded as a reduction of revenue rather than as an expense.

122 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 1

Voice local, voice long distance, data and wireless network: Decisions’ initial four-year periods. Other than for the interest accrued The Company recognizes revenues on the accrual basis and includes on the balance of the deferral account, which would be included in an estimate of revenues earned but unbilled. Wireline and wireless financing costs, substantially all statement of income and other com- service revenues are recognized based upon usage of the Company’s prehensive income effects of the deferral account are recorded through network and facilities and upon contract fees. operating revenues. Advance billings are recorded when billing occurs prior to rendering the associated service; such advance billings are recognized as revenue (d) Cost of acquisition and advertising costs in the period in which the services are provided. Similarly, and as appro- Costs of acquiring customers, which include the total cost of hardware priate, upfront customer activation and connection fees are deferred and subsidies, commissions, advertising and promotion related to the initial recognized over the average expected term of the customer relationship. customer acquisition, are expensed as incurred and are included in the The Company follows the liability method of accounting for its quality Consolidated Statements of Income and Other Comprehensive Income of service rate rebate amounts that arise from the jurisdiction of the CRTC. as a component of Operations expense. Costs of advertising production, The CRTC has established a portable subsidy mechanism to airtime and space are expensed as incurred. subsidize Local Exchange Carriers, such as the Company, that provide residential service to high cost serving areas. The CRTC has deter- (e) Research and development mined the per line/per band portable subsidy rate for all Local Exchange Research and development costs are expensed except in cases Carriers. The Company recognizes the portable subsidy on an accrual where development costs meet certain identifiable criteria for capitaliza- basis by applying the subsidy rate to the number of residential network tion. Capitalized development costs are amortized over the life of the access lines it has in high cost serving areas, as further discussed in commercial production, or in the case of serviceable property, plant Note 4(c). Differences, if any, between interim and final subsidy rates set and equipment, are included in the appropriate property group and are by the CRTC are accounted for as a change in estimate in the period depreciated over its estimated useful life. in which the CRTC finalizes the subsidy rate. Other and wireless equipment: The Company recognizes product (f) Depreciation and amortization revenues, including wireless handsets sold to re-sellers and customer Assets are depreciated on a straight-line basis over their estimated premises equipment, when the products are delivered and accepted by useful life as determined by a continuing program of studies. Depreciation the end-user customers. Revenues from operating leases of equipment includes amortization of assets under capital leases and amortization are recognized on a systematic and rational basis (normally a straight-line of leasehold improvements. Leasehold improvements are normally amor- basis) over the term of the lease. tized over the lesser of their expected average service life or the term Non-high cost serving area deferral account: On May 30, 2002, of the lease. Intangible assets with finite lives (intangible assets subject to and on July 31, 2002, the CRTC issued Decision 2002-34 and Decision amortization) are amortized on a straight-line basis over their estimated 2002-43, respectively, pronouncements that affected the Company’s lives; estimated lives are reviewed at least annually and are adjusted as wireline revenues initially for the four-year periods beginning June 1, 2002, appropriate. The continuing program of asset life studies considers such and August 1, 2002, respectively; subsequently the pronouncements items as timing of technological obsolescence, competitive pressures were extended by one year. In an effort to foster competition for residen- and future infrastructure utilization plans; such considerations could also tial basic service in non-high cost serving areas, the concept of a deferral indicate that carrying values of assets may not be recoverable. If the account mechanism was introduced by the CRTC, as an alternative carrying values of assets were not considered recoverable, an impairment to mandating price reductions. provision (measured at the amount by which the carrying values of the The deferral account arises from the CRTC requiring the Company assets exceed their fair values) would be recorded. to defer the statement of income recognition of a portion of the monies Estimated useful lives for the majority of the Company’s property, received in respect of residential basic services provided to non-high plant and equipment subject to depreciation are as follows: cost serving areas. The revenue deferral was based on the rate of infla- Estimated useful lives(1) tion (as measured by a chain-weighted Gross Domestic Product Price Network assets Index), less a productivity offset, and other exogenous factors that were Outside plant 17 to 40 years associated with allowed recoveries in previous price cap regimes that Inside plant 5 to 15 years have now expired. The Company may recognize the deferred amounts Wireless site equipment 6.5 to 8 years upon the undertaking of qualifying actions, such as Service Improvement Balance of depreciable property, plant and equipment 4 to 20 years Programs in qualifying non-high cost serving areas, rate reductions (1) The composite depreciation rate for the year ended December 31, 2010, was 5.1% (including those provided to competitors as required in Decision 2002-34 (2009 – 5.4%). The rate is calculated by dividing depreciation expense by an average and Decision 2002-43), enhancement of accessibility to telecommunica- gross book value of depreciable assets for the reporting period. A result of this tions services for individuals with disabilities and/or rebates to customers. methodology is that the composite depreciation rate will be lower in a period that has a higher proportion of fully depreciated assets remaining in use. The deferral account balance also reflects an interest expense component based on the Company’s applicable short-term cost of borrowing. Estimated useful lives for the majority of the Company’s intangible The Company has adopted the liability method of accounting for assets subject to amortization are as follows: the deferral account. This results in the Company recording a liability to the extent that activities it has undertaken, realized rate reductions for Estimated useful lives Competitor Services and other future qualifying events do not extinguish Wireline subscriber base 40 years the balance of the deferral account, as quantified in Note 21(b). This Software 3 to 5 years also resulted in the Company continuing to record incremental liability Access to rights-of-way and other 8 to 30 years amounts, subject to reductions for the mitigating activities, during the

TELUS 2010 annual report . 123 The carrying value of intangible assets with indefinite lives, and of industry and Company-specific facts is used in determining the goodwill, is periodically tested for impairment using a two-step fair value of the Company’s reporting units. impairment test. The frequency of the impairment test generally is the reciprocal of the stability of the relevant events and circumstances, (g) Translation of foreign currencies but intangible assets with indefinite lives and goodwill must, at a Trade transactions completed in foreign currencies are translated into minimum, be tested annually; the Company has selected December Canadian dollars at the rates prevailing at the time of the transactions. as its annual test time. No impairment amounts arose from the Monetary assets and liabilities denominated in foreign currencies are December 2010 and December 2009 annual tests. The test is translated into Canadian dollars at the rate of exchange in effect at applied to each of the Company’s two reporting units (the reporting the statement of financial position date with any resulting gain or loss units being identified in accordance with the criteria in the CICA being included in the Consolidated Statements of Income and Other Handbook section for intangible assets and goodwill): Wireless Comprehensive Income as Financing costs, as set out in Note 8. Hedge and Wireline. accounting is applied in specific instances as further discussed in Note 1(i). The Company assesses its goodwill by applying the prescribed The Company has minor foreign subsidiaries that are considered to method of comparing the fair value of its reporting units to the be self-sustaining. Accordingly, foreign exchange gains and losses arising carrying amounts of its reporting units. Consistent with current industry- from the translation of the minor foreign subsidiaries’ accounts into specific valuation methods, a combination of the discounted cash Canadian dollars are reported as a component of other comprehensive flow approach, the market comparable approach and analytical review income, as set out in Note 19(b).

(h) Financial instruments – recognition and measurement In respect of the recognition and measurement of financial instruments, the Company has adopted the following policies:

Classified as available-for-sale or held as part of a cash flow Classified as Financial instrument hedging relationship(1) held for trading(1)(2) Company’s reason for classification selection

Short-term marketable security investments(3) The Company has selected this method as it better reflects X management’s investment intentions Long-term investments not subject to The Company has selected classification as available-for-sale X significant influence of the Company (3) as it better reflects management’s investment intentions Stand-alone derivatives which are a part of The Company believes that classification as held for hedging an established and documented cash flow X results in a better matching of the change in the fair value hedging relationship with the risk exposure being hedged

(1) The distinction between classification as available-for-sale (or held as part of a cash flow hedging relationship) or held for trading is that unrealized changes in the fair values of financial instruments classified as available-for-sale, or the effective portion of unrealized changes in the fair values of financial instruments held for hedging, are included in other comprehensive income and unrealized changes in the fair values of financial instruments classified as held for trading are included in net income. (2) Certain financial instruments that are not required to be classified as held for trading may be classified as held for trading if the Company so chooses. (3) In respect of investments in securities for which the fair values can be reliably measured, the Company determines the classification on an instrument-by-instrument basis at time of initial recognition.

. Accounts receivable that are available-for-sale to an arm’s-length . In respect of hedges of anticipated transactions, which in the securitization trust are accounted for as loans and receivables. Company’s specific instance currently relates to inventory purchase The Company has selected this method as the benefits that would commitments, hedge gains/losses will be included in the cost of have been expected to arise from using the available-for-sale the inventory and will be expensed when the inventory is sold. method were not expected to exceed the costs of selecting and The Company has selected this method as it believes that a better implementing that method. matching with the risk exposure being hedged is achieved. . Regular-way purchases or sales (those which require actual delivery of financial assets or financial liabilities) are recognized on the trade (i) Hedge accounting date. The Company has selected this method as it is consistent General: The Company applies hedge accounting to the financial with the mandatory trade-date accounting required for derivative instruments used to: instruments. . establish designated currency hedging relationships for its U.S. . Transaction costs, other than in respect of held for trading items, dollar denominated long-term debt future cash outflows (semi-annual are added to the initial fair value of the acquired financial asset interest payments and principal payments at maturity), as set out in or financial liability. The Company has selected this method as it Note 5 and further discussed in Note 18(b); believes that this results in a better matching of the transaction . establish designated currency hedging relationships for certain costs with the periods benefiting from the transaction costs. U.S. dollar denominated future purchase commitments, as set out in Note 5; and . fix the compensation cost arising from specific grants of restricted stock units, as set out in Note 5 and further discussed in Note 12(c).

124 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 1

Hedge accounting: The purpose of hedge accounting, in respect The operations of the Company are complex and the related tax of the Company’s designated hedging relationships, is to ensure that interpretations, regulations and legislation are continually changing. counterbalancing gains and losses are recognized in the same periods. As a result, there are usually some tax matters in question that result The Company chose to apply hedge accounting, as it believes this in uncertain tax positions. The Company only recognizes the income is more representative of the economic substance of the underlying tax benefit of an uncertain tax position when it is more likely than transactions. not that the ultimate determination of the tax treatment of the position In order to apply hedge accounting, a high correlation (which indicates will result in that benefit being realized. The Company accrues for effectiveness) is required in the offsetting changes in the values of the interest charges on current tax liabilities that have not been funded, financial instruments (the hedging items) used to establish the designated which would include interest and penalties arising from uncertain tax hedging relationships and all, or a part, of the asset, liability or transac- positions. The Company includes such charges as a component tion having an identified risk exposure that the Company has taken steps of Financing costs. to modify (the hedged items). The Company assesses the anticipated The Company’s research and development activities may be effectiveness of designated hedging relationships at inception and for eligible to earn Investment Tax Credits; the determination of eligibility each reporting period thereafter. A designated hedging relationship is is a complex matter. The Company only recognizes the Investment considered effective by the Company if the following critical terms match Tax Credits when there is reasonable assurance that the ultimate deter- between the hedging item and the hedged item: the notional amount mination of the eligibility of the Company’s research and development of the hedging item and the principal of the hedged item; maturity dates; activities will result in the Investment Tax Credits being received. When payment dates; and interest rate index (if, and as, applicable). As set there is reasonable assurance that the Investment Tax Credits will out in Note 5(i), any ineffectiveness, such as from a difference between be received, they are accounted for using the cost reduction method the notional amount of the hedging item and the principal of the hedged whereby such credits are deducted from the expenditures or assets item, or if a previously effective designated hedging relationship becomes to which they relate, as set out in Note 9. ineffective, is reflected in the Consolidated Statements of Income and Other Comprehensive Income as Financing costs if in respect of long-term (k) Share-based compensation debt and as Operations expense if in respect of U.S. dollar denominated For share option awards granted after 2001, a fair value is determined future purchase commitments or share-based compensation. for share option awards at the date of grant and that fair value is recog- Hedging assets and liabilities: In the application of hedge accounting, nized in the financial statements. Proceeds arising from the exercise of an amount (the hedge value) is recorded on the Consolidated Statements share option awards are credited to share capital, as are the recognized of Financial Position in respect of the fair value of the hedging items. grant-date fair values of the exercised share option awards. The net difference, if any, between the amounts recognized in the deter- Share option awards which have a net-equity settlement feature, mination of net income and the amount necessary to reflect the fair as set out in Note 19(c), and which do not also have a net cash settle- value of the designated cash flow hedging items on the Consolidated ment feature, are accounted for as equity instruments. The Company Statements of Financial Position is effectively recognized as a component has selected the equity instrument fair value method of accounting of other comprehensive income, as set out in Note 19(b). for the net-equity settlement feature so as to align with the accounting In the application of hedge accounting to U.S. dollar denominated treatment afforded to the associated share option awards. long-term debt future cash outflows, the amount recognized in the deter- Share option awards which have a net-cash settlement feature, mination of net income is the amount that counterbalances the difference as set out in Note 12(b), are accounted for as liability instruments. between the Canadian dollar equivalent of the value of the hedged If share option awards which have the net-cash settlement feature and items at the rate of exchange at the statement of financial position date which were granted subsequent to 2001 are settled using other than and the Canadian dollar equivalent of the value of the hedged items the net-cash settlement feature, they would revert to being accounted at the rate of exchange in the hedging items. for as equity instruments. In the application of hedge accounting to the compensation cost In respect of restricted stock units, as set out in Note 12(c), the arising from share-based compensation, the amount recognized in the Company accrues a liability equal to the product of the vesting restricted determination of net income is the amount that counterbalances the stock units multiplied by the fair market value of the corresponding shares difference between the quoted market price of the Company’s Non-Voting at the end of the reporting period (unless hedge accounting is applied, Shares at the statement of financial position date and the price of the as set out in Note 1(i)). The expense for restricted stock units that do not Company’s Non-Voting Shares in the hedging items. ultimately vest is reversed against the expense that had been previously recorded in their respect. (j) Income taxes When share-based compensation vests in one amount at a future The Company follows the liability method of accounting for income point in time (cliff vesting), the expense is recognized by the Company on taxes. Under this method, current income taxes are recognized for the a straight-line basis over the vesting period. When share-based compen- estimated income taxes payable for the current year. Future income sation vests in tranches (graded vesting), the expense is recognized by tax assets and liabilities are recognized for temporary differences between the Company using the accelerated expense attribution method. the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax (l) Employee future benefit plans purposes that are more likely than not to be realized. The amounts recog- The Company accrues for its obligations under employee defined benefit nized in respect of future income tax assets and liabilities are based upon plans, and the related costs, net of plan assets. The cost of pensions the expected timing of the reversal of temporary differences or usage and other retirement benefits earned by employees is actuarially deter- of tax losses and application of the substantively enacted tax rates at the mined using the projected benefit method pro-rated on service and time of reversal or usage. management’s best estimate of expected plan investment performance,

TELUS 2010 annual report . 125 salary escalation and retirement ages of employees. For the purpose (p) Property, plant and equipment; intangible assets of calculating the expected return on plan assets, those assets are valued General: Property, plant and equipment and intangible assets are at fair value. The excess of the net actuarial gain (loss) over 10% of the recorded at historical cost and, with respect to self-constructed property, greater of the accrued benefit obligation and the fair value of the plan plant and equipment, include materials, direct labour and applicable assets is amortized over the expected average remaining service period overhead costs. With respect to internally developed, internal-use soft- of active employees of the plan, as are past service costs and transitional ware, recorded historical costs include materials, direct labour and assets and liabilities. direct labour-related costs. Where property, plant and equipment and The Company uses defined contribution accounting for the Telecom- intangible asset construction projects exceed $50 million and are of a munication Workers Pension Plan and the British Columbia Public Service sufficiently long duration (generally, longer than twelve months), an Pension Plan that cover certain of the Company’s employees. amount is capitalized for the cost of funds used to finance construction. The rate for calculating the capitalized financing costs is based on the (m) Cash and temporary investments, net Company’s one-year cost of borrowing. Cash and temporary investments, which may include investments When property, plant, equipment and/or intangible assets are sold in money market instruments that are purchased three months or less by the Company, the historical cost less accumulated depreciation is from maturity, are presented net of outstanding items including cheques netted against the sale proceeds and the difference is included in the written but not cleared by the bank as at the statement of financial Consolidated Statements of Income and Other Comprehensive Income position date. Cash and temporary investments, net, are classified as as Other expense, net. a liability on the statement of financial position when the amount of Asset retirement obligations: Liabilities are recognized for statutory, the cheques written but not cleared by the bank exceeds the amount contractual or legal obligations, normally when incurred, associated of the cash and temporary investments. When cash and temporary with the retirement of property, plant and equipment (primarily certain investments, net, are classified as a liability, they may also include over- items of outside plant and wireless site equipment) when those obliga- draft amounts drawn on the Company’s bilateral bank facilities, which tions result from the acquisition, construction, development and/or revolve daily and are discussed further in Note 17. normal operation of the assets. The obligations are measured initially at fair value, determined using present value methodology, and the resulting (n) Sales of receivables costs are capitalized into the carrying amount of the related asset. In Transfers of receivables in securitization transactions are recognized subsequent periods, the liability is adjusted for the accretion of discount as sales when the Company is deemed to have surrendered control and any changes in the amount or timing of the underlying future cash over the transferred receivables and consideration, other than for flows. The capitalized asset retirement cost is depreciated on the same its beneficial interests in the transferred receivables, has been received. basis as the related asset and the discount accretion is included in When the Company sells its receivables, it retains reserve accounts, determining the results of operations. which are retained interests in the securitized receivables, and servicing rights. When a transfer is considered a sale, the Company derecog- (q) Leases nizes all receivables sold, recognizes at fair value the assets received Leases are classified as capital or operating depending upon the terms and the liabilities incurred and records the gain or loss on sale in the and conditions of the contracts. Consolidated Statements of Income and Other Comprehensive Income Where the Company is the lessee, asset values recorded under as Other expense, net. The amount of gain or loss recognized on the capital leases are amortized on a straight-line basis over the period of sale of receivables depends in part on the previous carrying amount of expected use. Obligations recorded under capital leases are reduced the receivables involved in the transfer, allocated between the receivables by lease payments net of imputed interest. sold and the retained interests based upon their relative fair market For the year ended December 31, 2010, real estate and vehicle value at the sale date. The Company estimates the fair value for its operating lease expenses, which are net of the amortization of the retained interests based on the present value of future expected cash deferred gain on the sale-leaseback of buildings, were $254 million flows using management’s best estimates of the key assumptions (2009 – $237 million). The unamortized balances of the deferred gains (credit losses, the weighted average life of the receivables sold and on the sale-leaseback of buildings are set out in Note 21(b). discount rates commensurate with the risks involved). (r) Investments (o) Inventories The Company accounts for its investments in companies over which The Company’s inventory consists primarily of wireless handsets, it has significant influence using the equity basis of accounting whereby parts and accessories and communications equipment held for resale. the investments are initially recorded at cost and subsequently adjusted Inventories are valued at the lower of cost and net realizable value, to recognize the Company’s share of earnings or losses of the investee with cost being determined on an average cost basis. Previous write- companies and reduced by dividends received. The excess of the cost downs to net realizable value are reversed if there is a subsequent of equity investments over the underlying book value at the date of increase in the value of the related inventories. See Note 21(b). acquisition, except for goodwill, is amortized over the estimated useful lives of the underlying assets to which it is attributed.

126 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 2–3

The Company accounts for its other investments as available-for- included in the Consolidated Statements of Income and Other Compre- sale at their fair values unless the investment securities do not have hensive Income as a component of other comprehensive income. When quoted market prices in an active market, in which case the Company there is an other than temporary decline in the value of the investment, the uses the cost basis of accounting whereby investments are initially carrying values of investments accounted for using the equity, available- recorded at cost and earnings from such investments are recognized for-sale and cost methods are reduced to estimated fair values with such only to the extent received or receivable. The cost of investments sold reduction being included in the Consolidated Statements of Income and or amounts reclassified out of other comprehensive income into earnings Other Comprehensive Income as Other expense, net. are determined on a specific identification basis. Unless there is an other than temporary decline in the value of an (s) Comparative amounts available-for-sale investment, carrying values for available-for-sale invest- Certain of the comparative amounts have been reclassified to conform to ments are adjusted to estimated fair values with such adjustment being the presentation adopted currently.

ACCOUNTING POLICY DEVELOPMENTS Summary review of generally accepted accounting principle developments 2 that do, will, or may, affect the Company

Convergence with International Financial Standards as issued by the International Accounting Standards Reporting Standards as issued by the International Board (IFRS-IASB) over a transitional period to be complete by 2011. Accounting Standards Board The Company will be required to report using the converged standards In 2006, Canada’s Accounting Standards Board ratified a strategic effective for interim and annual financial statements relating to fiscal plan that will result in Canadian GAAP, as used by publicly accountable years beginning no later than on or after January 1, 2011, the date which enterprises, being fully converged with International Financial Reporting the Company has selected for adoption.

CAPITAL STRUCTURE FINANCIAL POLICIES Summary review of the Company’s objectives, policies and processes 3 for managing its capital structure

The Company’s objectives when managing capital are: (i) to maintain Net debt to EBITDA – excluding restructuring costs is calculated as a flexible capital structure that optimizes the cost of capital at acceptable net debt at the end of the period divided by twelve-month trailing EBITDA risk; and (ii) to manage capital in a manner that considers the interests – excluding restructuring costs. Net debt is a measure that does not of equity and debt holders. have any standardized meaning prescribed by GAAP and is therefore In the management of capital, the Company includes Common unlikely to be comparable to similar measures presented by other Share and Non-Voting Share equity (excluding accumulated other com- issuers; the calculation of net debt is as set out in the following schedule. prehensive income), long-term debt (including any associated hedging Net debt is one component of a ratio used to determine compliance assets or liabilities, net of amounts recognized in accumulated other with debt covenants. The calculation of EBITDA – excluding restructuring comprehensive income), cash and temporary investments and securitized costs is a measure that does not have any standardized meaning pre- accounts receivable in the definition of capital. scribed by GAAP and is therefore unlikely to be comparable to similar The Company manages the capital structure and makes adjustments measures presented by other issuers; the calculation of EBITDA – to it in the light of changes in economic conditions and the risk charac- excluding restructuring costs is as set out in the following schedule. teristics of the underlying assets. In order to maintain or adjust the capital This measure, historically, is substantially the same as the leverage structure, the Company may adjust the amount of dividends paid to ratio covenant in the Company’s credit facilities. holders of Common Shares and Non-Voting Shares, purchase shares for The reported dividend payout ratio is calculated as the quarterly cancellation pursuant to permitted normal course issuer bids, issue new dividend declared per Common Share and Non-Voting Share, as shares, issue new debt, issue new debt to replace existing debt with recorded in the financial statements, multiplied by four and divided by different characteristics and/or increase or decrease the amount of sales the sum of basic earnings per share for the most recent four quarters of trade receivables to an arm’s-length securitization trust. for interim reporting periods (divided by annual basic earnings per The Company monitors capital on a number of bases, including: net share for fiscal years); the reported dividend payout ratio of adjusted debt to Earnings Before Interest, Taxes, Depreciation and Amortization – net earnings differs in that it excludes: income tax-related adjustments; excluding restructuring costs (EBITDA – excluding restructuring costs); the loss on redemption of long-term debt; and the ongoing impacts and dividend payout ratios. of the share options with the net-cash settlement feature.

TELUS 2010 annual report . 127 During 2010, the Company’s strategy, which was unchanged from believes that its financial policies and guidelines, which are reviewed 2009 (other than to change the dividend payout ratio guideline to 55–65% annually, are currently at the optimal level and, by maintaining credit of adjusted net earnings on a prospective basis), included maintain- ratings in the range of BBB+ to A–, or the equivalent, provide reasonable ing the financial policy set out in the following schedule. The Company access to capital.

As at, or twelve-month periods ended, December 31 ($ in millions) Policy 2010 2009

Components of debt and coverage ratios Net debt(1) $ß6,869 $ß7,312 EBITDA – excluding restructuring costs(2) $ß3,717 $ß3,681 Net interest cost(3) $ 510 $ 532 Debt ratio Net debt to EBITDA – excluding restructuring costs 1.5–2.0 1.8 2.0 Coverage ratios Earnings coverage (interest coverage on long-term debt)(4) 3.8 3.1 EBITDA – excluding restructuring costs interest coverage(5) 7.3 6.9 Other measures Dividend payout ratio of adjusted net earnings(6) 65% 67% Dividend payout ratio 65% 61%

(1) Net debt is calculated as follows: (4) Earnings coverage (interest coverage on long-term debt) is defined as net income 2010 2009 before interest expense on long-term debt and income tax expense, divided by Long-term debt (Note 18) $ß6,056 $ß6,172 interest expense on long-term debt (including losses recorded on the redemption Debt issuance costs netted against long-term debt 28 30 of long-term debt, if any). Derivative liabilities, net 404 721 (5) EBITDA – excluding restructuring costs interest coverage is defined as EBITDA Accumulated other comprehensive income amounts – excluding restructuring costs divided by net interest cost. This measure is arising from financial instruments used to manage substantially the same as the coverage ratio covenant in the Company’s credit interest rate and currency risks associated with facilities. U.S. dollar denominated debt (excluding tax effects) (2) (70) (6) Adjusted net earnings per Common Share and Non-Voting Share is calculated Cash and temporary investments, net (17) (41) as follows: Cumulative proceeds from accounts receivable 2010 2009 securitization (Note 14) 400 500 Net income attributable to Common Shares Net debt $ß6,869 $ß7,312 and Non-Voting Shares $ 1,034 $ 998 Income tax-related adjustments (30) (165) (2) EBITDA – excluding restructuring costs is calculated as follows: Loss on redemption of long-term debt, net of income taxes 37 69 2010 2009 Impacts of share options with the net-cash settlement feature, net of income taxes (7) 1 EBITDA (Note 6) $ 3,643 $ß3,491 Restructuring costs (Note 7) 74 190 Adjusted net earnings $ 1,034 $ 903 EBITDA – excluding restructuring costs $ 3,717 $ß3,681 Adjusted net earnings per Common Share and Non-Voting Share – basic $ 3.23 $ß2.84 (3) Net interest cost is defined as financing costs before gains on redemption and repayment of debt, calculated on a twelve-month trailing basis (losses recorded on the redemption of long-term debt, if any, are included in net interest cost).

The net debt to EBITDA – excluding restructuring costs ratio decreased costs interest coverage ratio for 2010 was 7.3 times, up from 6.9 times principally due to lower net debt. The earnings coverage (interest cover- in 2009, due mainly to lower redemption premiums on long-term debt age on long-term debt) ratio was 3.8 times in 2010, up from 3.1 times and higher EBITDA – excluding restructuring costs, partly offset by one year earlier. A decrease in long-term debt interest expense, including net interest costs including lower interest income from tax settlements. losses on long-term debt redemption (see Note 8), increased the ratio by These ratios, adjusted to exclude the losses on redemption of long- 0.6, and higher income before income taxes and long-term debt interest term debt of $52 million in 2010 and $99 million in 2009, was 7.8 times expense increased the ratio by 0.1. The EBITDA – excluding restructuring and 8.5 times, respectively, in 2010 and 2009.

128 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 4

REGULATION OF RATES CHARGED TO CUSTOMERS Summary review of rate regulation impacts on Company operations 4 and revenues

(a) General The major categories of telecommunications services provided by The provision of telecommunications services by the Company through TELUS Communications Company partnership that are subject to rate TELUS Communications Company partnership and the TELE-MOBILE regulation or have been forborne from rate regulation are as follows:

COMPANY partnership is subject to regulation under provisions Regulated services of the Telecommunications Act. The regulatory authority designated . Residential wireline local services in incumbent local exchange carrier to implement the Telecommunications Act is the CRTC, which is regions in non-forborne exchanges established pursuant to the terms of the Canadian Radio-television and . Business wireline local services in incumbent local exchange carrier Telecommunications Act. regions in non-forborne exchanges Pursuant to Part III of the Telecommunications Act, the CRTC may . Competitor services forbear, conditionally or unconditionally, from regulating the rates for . Public telephone services certain telecommunications services, or certain classes of telecommuni- . Miscellaneous other revenue cations service providers, where the CRTC finds that the service or class of service provided by the telecommunications service provider Forborne services (not subject to rate regulation) is subject to competition sufficient to protect the interests of customers. . Residential wireline services in incumbent local exchange carrier regions TELUS Communications Company partnership has, for example, in forborne exchanges(1) been granted forbearance from regulation in relation to its entire port- . Business wireline services in incumbent local exchange carrier regions (2) folio of wireless and paging services. In the latter half of 2007, TELUS in forborne exchanges . Non-incumbent local exchange carrier services Communications Company partnership was granted forbearance in . Long distance services relation to the setting of rates for a number of its wireline telecommunica- . Internet and television services tions services that are currently provided within 96 residential and 47 . International telecommunications services business exchanges where it was determined that there was significant . Interexchange private line services(3) competition for such services to protect the interests of customers. . Certain data services Previously forborne services, including interexchange voice services, . Cellular, enhanced specialized mobile radio digital (ESMR digital) wide area network services and retail Internet services, remain forborne. and personal communications services digital (PCS digital) TELUS Communications Company partnership also operates as a . Other wireless services, including paging forborne telecommunications service provider when it provides telecom- . Sale of customer premises equipment (CPE) munications services (primarily business local exchange service) outside (1) Forborne on exchanges where two or more competitors, including wireless service of its traditional incumbent serving territory (Alberta, British Columbia providers, are offering or providing similar services. (2) Forborne on exchanges where one or more competitors, including wireless service and parts of Quebec) and, as such, all of its services are not subject to providers, are offering or providing similar services. rate regulation. (3) Forborne on routes where one or more competitors are offering or providing services The fact that a portion of the Company’s operations remain subject at DS-3 or greater bandwidth. to rate regulation does not result in the Company selecting accounting policies that would differ from generally accepted accounting principles. (b) Price caps form of regulation Less than one-quarter of the Company’s revenues are from Wireline The CRTC has adopted a form of price cap regulation as the means segment regulated services and subject to CRTC price regulation; by which it regulates the prices for the Company’s telecommunications none of the Company’s Wireless segment revenues are currently subject rate regulated services. A four-year price regulation regime commenced to CRTC regulation. on June 1, 2002, with the issuance of the CRTC’s Decision 2002-34; on December 16, 2005, the CRTC issued Decision 2005-69 that extended that price cap regime, without changes, for a period of one year to May 31, 2007. The CRTC conducted a review of the existing price cap regulation, which included an oral hearing, with the CRTC issuing its decision in this matter on April 30, 2007. The decision was consistent with the Company’s current accounting policies.

TELUS 2010 annual report . 129 Rate-setting methodology: Under the prospective price regulation framework, services are separated into seven service categories, or baskets, for those exchanges which continue to be regulated. Price constraints within the individual baskets are outlined in the following table.

Capped and non-forborne basket Price cap constraint Overriding maximum annual increase

Residential wireline services in incumbent local exchange carrier regions In non-high cost serving areas Capped at existing rates 0% In high cost serving areas Increase by lesser of inflation(1) or 5% 5% Business wireline services in incumbent local exchange carrier regions Increase annually by inflation(1) 10% Other capped services Increase annually by inflation(1) 10% Competitor services Inflation(1) less 3.2% productivity offset 0% Public telephone services One-time increase to $0.50 n.a. Services with frozen rates (e.g. 9-1-1 service) Capped at existing rates 0%

(1) As measured by chain-weighted Gross Domestic Product Price Index.

Primary exchange rates for forborne services/exchanges are capped at existing rates.

(c) Other non-price cap regulation Voice contribution expense and portable subsidy revenue: Local Other: The CRTC has adopted an imputation test filing requirement exchange carriers’ costs of providing the level of basic residential to set floor prices for rate regulated services. The imputation test filing services that the CRTC requires to be provided in high cost serving requirements ensure that the incumbent telephone companies do not areas are more than the CRTC allows the local exchange carriers reduce rates for services below their costs in an effort to thwart competi- to charge for the level of service. To ameliorate the situation, the CRTC tive entry or engage in predatory pricing to drive out existing competitors. collects contribution payments, in a central fund, from all Canadian Unbundling of essential facilities: In an effort to foster facilities-based telecommunications service providers (including voice, data and competition in the provision of telecommunications services, the CRTC wireless service providers) that are then disbursed as portable subsidy has mandated that certain essential or near-essential facilities be made payments to subsidize the costs of providing residential telephone available to competitors at rates based on their incremental costs plus an services in high cost serving areas. The portable subsidy payments are approved mark-up. The CRTC has defined essential facilities as facilities paid based upon a total subsidy requirement calculated on a per line/ which are monopoly controlled, required by competitors as an input to per band subsidy rate, as further discussed in Note 1(c). The CRTC provide services and which cannot be economically or technically dupli- currently determines, at a national level, the total contribution require- cated by competitors (which include central office codes, subscriber ment necessary to pay the portable subsidies and then collects listings and certain local loops in high cost serving areas). The incumbent contribution payments from the Canadian telecommunications service local exchange carriers must provide certain non-essential facilities, providers, calculated as a percentage of their telecommunications which the CRTC deems to be near-essential, such as local loop facilities service revenue (as defined in CRTC Decision 2000-745 and Telecom in low cost areas and transiting arrangements, at prices determined as Order CRTC 2001-220). The final contribution expense rate for 2010 if they were essential facilities. This obligation on the part of the incumbent is 0.73% and the interim rate for 2011 has been similarly set at 0.73%. local exchange carriers will continue until the market for near-essential The Company’s contributions to the central fund, $46 million for loops and transiting arrangements is competitive. the year ended December 31, 2010 (2009 – $50 million), are accounted for as an operations expense and the portable subsidy receipts, $37 million for the year ended December 31, 2010 (2009 – $51 million), are accounted for as local revenue.

130 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 5

FINANCIAL INSTRUMENTS Summary schedules and review of financial instruments, including the management 5 of associated risks and fair values

(a) Risks – overview The Company’s financial instruments and the nature of risks which they may be subject to are as set out in the following table:

Risks

Market risks

Financial instrument Credit Liquidity Currency Interest rate Other price

Measured at cost or amortized cost Cash and temporary investments X X X Accounts receivable X X Accounts payable X X Restructuring accounts payable X Short-term obligations X X Long-term debt X X X

Measured at fair value Short-term investments X X Long-term investments X

Foreign exchange derivatives(1) X X X

Share-based compensation derivatives(1) X X X

Cross currency interest rate swap derivatives(1) X X X X

(1) Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only) and sets criteria for the creditworthiness of the transaction counterparties.

(b) Credit risk The following table presents an analysis of the age of customer Excluding credit risk, if any, arising from currency swaps settled on a accounts receivable not allowed for as at the dates of the Consolidated gross basis (see (c)), the best representation of the Company’s maximum Statements of Financial Position. As at December 31, 2010, the exposure (excluding tax effects) to credit risk, which is a worst-case weighted average life of customer accounts receivable is 28 days (2009 scenario and does not reflect results expected by the Company, is as – 35 days) and the weighted average life of past-due customer accounts set out in the following table: receivable is 59 days (2009 – 72 days). No interest is charged on

As at December 31 (millions) 2010 2009 customer accounts which are current. Thereafter, interest is charged at an industry-based market rate on outstanding balances. Cash and temporary investments, net $ß 17 $ß 41 Accounts receivable 917 694 As at December 31 (millions) 2010 2009 Derivative assets 9 1 Customer accounts receivable net of allowance $ß943 $ß736 for doubtful accounts Current $ß489 $ß321 Cash and temporary investments: Credit risk associated with 30–60 days past billing date 144 86 cash and temporary investments is minimized substantially by ensuring 61–90 days past billing date 35 23 that these financial assets are placed with: governments; major financial Greater than 90 days past billing date 32 67 institutions that have been accorded strong investment grade ratings $ß700 $ß497 by a primary rating agency; and/or other creditworthy counterparties. Customer accounts receivable (Note 21(b)) $ß741 $ß556 An ongoing review is performed to evaluate changes in the status Allowance for doubtful accounts (41) (59) of counterparties. Accounts receivable: Credit risk associated with accounts receivable $ß700 $ß497 is minimized by the Company’s large and diverse customer base, which The Company must make significant estimates in respect of the covers substantially all consumer and business sectors in Canada. The allowance for doubtful accounts. Current economic conditions, historical Company follows a program of credit evaluations of customers and limits information, why the accounts are past-due and line of business from the amount of credit extended when deemed necessary. The Company which the customer accounts receivable arose are all considered maintains allowances for potential credit losses, and any such losses when determining whether past-due accounts should be allowed for; to date have been within management’s expectations.

TELUS 2010 annual report . 131 the same factors are considered when determining whether to write While the Company is exposed to credit losses due to the non- off amounts charged to the allowance account against the customer performance of its counterparties, the Company considers the risk account receivable. The provision for doubtful accounts is calculated of this remote. The Company’s derivative liabilities do not have on a specific-identification basis for customer accounts receivable credit-risk-related contingent features. over a specific balance threshold and on a statistically derived allowance basis for the remainder. No customer accounts receivable are written (c) Liquidity risk off directly to the provision for doubtful accounts. As a component of the Company’s capital structure financial The following table presents a summary of the activity related to the policies, discussed further in Note 3, the Company manages liquidity Company’s allowance for doubtful accounts. risk by maintaining a daily cash pooling process which enables the

Years ended December 31 (millions) 2010 2009 Company to manage its liquidity surplus and liquidity requirements according to the actual needs of the Company and its subsidiaries, by Balance, beginning of period $ß59 $ß77 maintaining bilateral bank facilities and syndicated credit facilities, by Additions (provision for doubtful accounts) 49 80 maintaining a commercial paper program, by the sales of trade receiv- Net use (67) (98) ables to an arm’s-length securitization trust, by continuously monitoring Balance, end of period $ß41 $ß59 forecast and actual cash flows and by managing maturity profiles of financial assets and financial liabilities. As disclosed in Note 18(g), Aside from the normal customer accounts receivable credit risk the Company has significant debt maturities in future years. As at associated with its retained interest, the Company has no continuing December 31, 2010, the Company has access to a shelf prospectus, exposure to credit risk associated with its trade receivables which in effect until October 2011, pursuant to which it can offer $2 billion are sold to an arm’s-length securitization trust, as discussed further (2009 – $3 billion) of debt or equity securities. The Company believes in Note 14. that its investment grade credit ratings provide reasonable access Derivative assets (and derivative liabilities): Counterparties to the to capital markets. Company’s cross currency interest rate swap agreements, share-based The Company closely matches the derivative financial liability con- compensation cash-settled equity forward agreements and foreign tractual maturities with those of the risk exposures that they are being exchange derivatives are major financial institutions that have all been used to manage. accorded investment grade ratings by a primary rating agency. The The Company’s undiscounted financial liability expected maturities dollar amount of credit exposure under contracts with any one financial do not differ significantly from the contractual maturities. The Company’s institution is limited and counterparties’ credit ratings are monitored. undiscounted financial liability contractual maturities, including interest The Company does not give or receive collateral on swap agreements thereon (where applicable), are as set out in the following tables: and hedging items due to its credit rating and those of its counterparties.

Non-derivative Derivative

Long-term debt (see Note 18) Other financial liabilities Non-interest Currency swaps amounts Currency swaps amounts As at bearing All except (2) to be exchanged to be exchanged December 31, 2010 financial capital Capital (millions) liabilities leases(1)(2) leases (Receive) Pay Other (Receive) Pay Total

2 011 First quarter $ß1,173 $ 58 $ß3 $ – $ – $ß13 $ß(116) $ß118 $ß 1,249 Balance of year 229 1,013 5 (766) 1,183 – (190) 191 1,665 2012 1 701 – – – – – – 702 2013 – 583 – – – – – – 583 2014 – 958 – – – – – – 958 2015 – 851 – – – – – – 851 Thereafter 1 4,266 – – – – – – 4,267 Tot a l $ß1,404 $ß8,430 $ß8 $ß(766) $ß1,183 $ß13 $ß(306) $ß309 $ß10,275 Total (see Note 18(g)) $ß8,855

(1) Interest payment cash outflows in respect of commercial paper and amounts drawn under the Company’s credit facilities (if any) have been calculated based upon the rates in effect as at December 31, 2010. (2) The amounts included in the undiscounted non-derivative long-term debt in respect of the U.S. dollar denominated long-term debt, and the corresponding amounts included in the long-term debt currency swaps receive column, have been determined based upon the rates in effect as at December 31, 2010. The U.S. dollar denominated long-term debt contractual maturity amounts, in effect, are reflected in the long-term debt currency swaps pay column as gross cash flows are exchanged pursuant to the cross currency interest rate swap agreements (see Note 18(b)).

132 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 5

Non-derivative Derivative

Long-term debt Other financial liabilities Non-interest Currency swaps amounts Currency swaps amounts As at bearing All except to be exchanged(2) to be exchanged December 31, 2009 financial capital Capital (millions) liabilities leases(1)(2) leases (Receive) Pay Other (Receive) Pay Tot a l

2010 First quarter $ß1,023 $ 35 $ß1 $ß – $ – $ß51 $ß (75) $ß 77 $ß 1,112 Balance of year 309 420 1 (113) 175 9 (95) 95 801 2 011 – 1,728 1 (1,473) 2,152 – – – 2,408 2012 – 1,014 – – – – – – 1,014 2013 – 532 – – – – – – 532 2014 – 907 – – – – – – 907 Thereafter 1 3,813 – – – – – – 3,814 Tot a l $ß1,333 $ß8,449 $ß3 $ß(1,586) $ß2,327 $ß60 $ß(170) $ß172 $ß10,588 Total $ß9,193

(1) Interest payment cash outflows in respect of commercial paper and amounts drawn under the Company’s credit facilities (if any) have been calculated based upon the rates in effect as at December 31, 2009. (2) The amounts included in the undiscounted non-derivative long-term debt in respect of the U.S. dollar denominated long-term debt, and the corresponding amounts included in the long-term debt currency swaps receive column, have been determined based upon the rates in effect as at December 31, 2009. The U.S. dollar denominated long-term debt contractual maturity amounts, in effect, are reflected in the long-term debt currency swaps pay column as gross cash flows are exchanged pursuant to the cross currency interest rate swap agreements (see Note 18(b)).

(d) Currency risk (Note 18(d)), it is all fixed-rate debt. The fair value of fixed-rate debt The Company’s functional currency is the Canadian dollar, but it regularly fluctuates with changes in market interest rates; absent early redemption transacts in U.S. dollars due to certain routine revenues and operating and/or foreign exchange rate fluctuations, the related future cash flows costs being denominated in U.S. dollars, as well as sourcing some do not change. Due to the short maturities of commercial paper, its fair inventory purchases and capital asset acquisitions internationally. The values are not materially affected by changes in market interest rates but U.S. dollar is the only foreign currency to which the Company has a its cash flows representing interest payments may be if the commercial significant exposure. paper is rolled over. The Company’s foreign exchange risk management includes the Amounts drawn on the Company’s short-term and long-term credit use of foreign currency forward contracts and currency options to fix facilities will be affected by changes in market interest rates in a manner the exchange rates on short-term U.S. dollar denominated transactions similar to commercial paper. and commitments. Hedge accounting is applied to these short-term Similar to fixed-rate debt, the fair value of the Company’s cross foreign currency forward contracts and currency options on an exception currency interest rate swap derivatives fluctuates with changes in market basis only. interest rates as the interest rate swapped to is fixed; absent early The Company is also exposed to currency risks in that the fair redemption, the related future cash flows do not change due to changes value or future cash flows of its U.S. dollar denominated long-term debt in market interest rates. will fluctuate because of changes in foreign exchange rates. Currency hedging relationships have been established for the related semi-annual (f) Other price risk interest payments and principal payment at maturity. Investments: If the balance of short-term investments includes equity instruments, the Company would be exposed to equity price risks, as it (e) Interest rate risk would be if it held investments classified as available-for-sale. Long-term Changes in market interest rates will cause fluctuations in the fair value investments are held for strategic rather than trading purposes. or future cash flows of temporary investments, short-term investments, Share-based compensation derivatives: The Company is exposed short-term obligations, long-term debt and/or cross currency interest rate to other price risk arising from cash-settled share-based compensation swap derivatives. (appreciating Common Share and Non-Voting Share prices increase When the Company has temporary investments, they have short both the expense and the potential cash outflow). Cash-settled equity maturities and fixed rates, thus their fair value will fluctuate with changes swap agreements have been entered into that establish a cap on in market interest rates; absent monetization prior to maturity, the related the Company’s cost associated with its net-cash settled share options future cash flows do not change due to changes in market interest rates. (Note 12(b)) and fix the Company’s cost associated with its restricted If the balance of short-term investments includes debt instruments stock units (Note 12(c)). and/or dividend-paying equity instruments, the Company could be exposed to interest rate risks. (g) Market risk As short-term obligations arising from bilateral bank facilities, which Net income and other comprehensive income for the years ended typically have variable interest rates, are rarely outstanding for periods December 31, 2010 and 2009, could have varied if the Canadian that exceed one calendar week, interest rate risk associated with this item dollar: U.S. dollar foreign exchange rates, market interest rates and is not material. the Company’s Common Share and Non-Voting Share prices varied In respect of the Company’s currently outstanding long-term debt, by reasonably possible amounts from their actual statement of other than for commercial paper and amounts drawn on its credit facilities financial position date values.

TELUS 2010 annual report . 133 The sensitivity analysis of the Company’s exposure to currency date. The relevant statement of financial position date principal and risk at the reporting date has been determined based upon the hypo- notional amounts have been used in the calculations. thetical change taking place at the statement of financial position date The sensitivity analysis of the Company’s exposure to other price (as contrasted with applying the hypothetical change to all relevant risk arising from share-based compensation at the reporting date has transactions during the reported periods). The U.S. dollar denominated been determined based upon the hypothetical change taking place balances and derivative financial instrument notional amounts as at the relevant statement of financial position date. The relevant state- at the statement of financial position dates have been used in the ment of financial position date notional number of shares, including calculations. those in the cash-settled equity swap agreements, has been used in The sensitivity analysis of the Company’s exposure to interest rate the calculations. risk at the reporting date has been determined based upon the hypo- The income tax provisions, which are reflected net in the sensitivity thetical change taking place at the beginning of the relevant fiscal year analysis, reflect the applicable basic blended federal and provincial and being held constant through to the statement of financial position statutory income tax rates for the reporting periods.

Net income Other comprehensive income Comprehensive income Years ended December 31 ($ increase (decrease) in millions) 2010 2009 2010 2009 2010 2009

Reasonably possible changes in market risks(1) 10% change in Cdn. $: U.S.$ exchange rate Canadian dollar appreciates $ß(7) $ß(5) $ß(10) $ß(16) $ß(17) $ß(21) Canadian dollar depreciates $ 7 $ 5 $ 10 $ 16 $ 17 $ 21 25 basis point change in market interest rate Rate increases $ß(1) $ß(2) $ – $ 2 $ß (1) $ – Rate decreases $ 1 $ 2 $ – $ß (2) $ 1 $ – 25%(2) change in Common Share and Non-Voting Share prices(3) Price increases $ß(2) $ – $ 4 $ 3 $ 2 $ 3 Price decreases $ 1 $ß(8) $ß (4) $ß (3) $ß (3) $ß(11)

(1) These sensitivities are hypothetical and should be used with caution. Changes in net income and/or other comprehensive income generally cannot be extrapolated because the relationship of the change in assumption to the change in net income and/or other comprehensive income may not be linear. In this table, the effect of a variation in a particular assumption on the amount of net income and/or other comprehensive income is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in more favourable foreign exchange rates (increased strength of the Canadian dollar)), which might magnify or counteract the sensitivities. The sensitivity analysis assumes that changes in exchange rates and market interest rates would be realized by the Company; in reality, the competitive marketplace in which the Company operates would impact this assumption. No provision has been made for a difference in the notional number of shares associated with share-based compensation awards made during the reporting period that may have arisen due to a difference in the Non-Voting Share price. (2) To facilitate ongoing comparison of sensitivities, a constant variance of approximate magnitude has been used. Reflecting a 4.5-year data period and calculated on a monthly basis, which is consistent with the current assumptions and methodology set out in Note 12(b), the volatility of the Company’s Non-Voting Share price as at December 31, 2010, was 26.7% (2009 – 26.4%); reflecting the twelve-month data period ended December 31, 2010, the volatility was 14.2% (2009 – 26.9%). (3) The hypothetical effects of changes in the prices of the Company’s Common Shares and Non-Voting Shares are restricted to those which would arise from the Company’s share- based compensation items which are accounted for as liability instruments and the associated cash-settled equity swap agreements.

The Company is exposed to other price risks in respect of its financial instruments, as discussed further in Note 5(f).

(h) Fair values same or similar financial instruments or on the current rates offered General: The carrying values of cash and temporary investments, to the Company for financial instruments of the same maturity as well accounts receivable, accounts payable, restructuring accounts as the use of discounted future cash flows using current rates for similar payable and short-term obligations approximate their fair values due financial instruments subject to similar risks and maturities (such fair to the immediate or short-term maturity of these financial instruments. value estimates being largely based upon Canadian dollar: U.S. dollar The carrying values of the Company’s investments accounted for foreign exchange forward rates and interest rate yield curves as at using the cost method do not exceed their fair values. the statement of financial position dates). The carrying value of short-term investments, if any, equals their fair The fair values of the Company’s derivative financial instruments value as they are classified as held for trading. The fair value is deter- used to manage exposure to increases in compensation costs arising mined directly by reference to quoted market prices in active markets. from certain forms of share-based compensation are based upon The fair values of the Company’s long-term debt are based on fair value estimates of the related cash-settled equity forward agree- quoted market prices in active markets. ments provided by the counterparty to the transactions (such fair The fair values of the Company’s derivative financial instruments value estimates being largely based upon the Company’s Common used to manage exposure to interest rate and currency risks are Share and Non-Voting Share prices as at the statement of financial estimated based on quoted market prices in active markets for the position dates).

134 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 5

The Company’s financial instruments that are measured at fair value on a recurring basis in periods subsequent to initial recognition and the level within the fair value hierarchy used to measure them are as set out in the following table.

Fair value measurements at reporting date using

Quoted prices in active Significant other Significant markets for identical items observable inputs unobservable inputs Carrying value (Level 1) (Level 2) (Level 3)

As at December 31 (millions) 2010 2009 2010 2009 2010 2009 2010 2009

Assets Foreign exchange derivatives $ß – $ß 1 $ß– $ß– $ß – $ß 1 $ß– $ß– Share-based compensation derivatives 9 – – – 9 – – – $ß 9 $ß 1 $ß– $ß– $ß 9 $ß 1 $ß– $ß– Liabilities Foreign exchange derivatives $ß 2 $ß 2 $ß– $ß– $ß 2 $ß 2 $ß– $ß– Share-based compensation derivatives 13 60 – – 13 60 – – Cross currency interest rate swap derivatives 404 721 – – 404 721 – – $ß419 $ß783 $ß– $ß– $ß419 $ß783 $ß– $ß–

Derivative: The Company’s derivative financial instruments that are measured at fair value on a recurring basis subsequent to initial recognition are as set out in the following table.

As at December 31 (millions) 2010 2009

Maximum Notional Carrying Notional Carrying maturity date amount amount Fair value amount amount Fair value

Current Assets Derivatives designated as held for trading upon initial recognition and used to manage currency risks arising from U.S. dollar revenues to which hedge accounting is not applied 2 011 $ß48 $ ß– $ ß– $ß23 $ß1 $ß1 Derivatives(1) used to manage changes in share-based compensation costs and classified as held for hedging(2) (Note 12(c)) 2 011 $ß14 4 4 $ß – – – $ß4 $ß4 $ß1 $ß1 Other Long-Term Assets Derivatives(1) used to manage changes in share-based compensation costs and classified as held for hedging(2) (Note 12(c)) 2012 $ß15 $ß5 $ß4 $ß12 $ß– $ß– Deduct: Net amounts due to counterparties in respect of derivatives used to manage changes in share-based compensation costs and classified as held for hedging (1) – $ß4 $ß4 $ß– $ß–

(1) Designated as cash flow hedging items. (2) Hedge accounting is applied to derivatives that are designated as held for hedging.

TELUS 2010 annual report . 135 As at December 31 (millions) 2010 2009

Maximum Notional Carrying Notional Carrying maturity date amount amount Fair value amount amount Fair value

Current Liabilities Derivatives designated as held for trading upon initial recognition and used to manage currency risks arising from U.S. dollar denominated purchases to which hedge accounting is not applied 2 011 $ 140 $ß 1 $ß 1 $ 102 $ß 2 $ß 2 Derivatives(1) designated as held for hedging(2) upon initial recognition and used to manage currency risks arising from U.S. dollar denominated purchases 2 011 $ 121 1 1 $ 79 – – Derivatives used to manage changes in share-based compensation costs and classified as held for – Trading (Note 12(b)) 2012 $ 60 13 13 $ 130 51 51 – Hedging(1)(2) (Note 12(c)) 2010 $ – – – $ 26 9 9 Current amount of derivatives(1) classified as held for hedging(2) and used to manage currency risks associated with U.S. dollar denominated debt (Note 18(b)) 2 011 $ß1,133 404 407 $ – – – 419 62 Add: Interest payable in respect of derivatives used to manage currency risks associated with U.S. dollar denominated debt and classified as held for hedging 3 – $ß422 $ß422 $ß 62 $ß 62 Other Long-Term Liabilities Derivatives(1) used to manage changes in share-based compensation costs and classified as held for hedging(2) (Note 12(c)) 2012 $ß 4 $ß – $ß – $ – $ß – $ß – Non-current amount of derivatives(1) classified as held for hedging(2) and used to manage currency risks associated with U.S. dollar denominated debt (Note 18(b)) 2 011 $ – – – $ß2,064 721 726 – 721 Add: Interest payable in respect of derivatives used to manage currency risks associated with U.S. dollar denominated debt and classified as held for hedging – 5 $ß – $ß – $ß726 $ß726

(1) Designated as cash flow hedging items. (2) Hedge accounting is applied to derivatives that are designated as held for hedging.

Non-derivative: The Company’s long-term debt, which is measured at amortized cost, and the fair value thereof, is as set out in the following table.

As at December 31 (millions) 2010 2009

Carrying Carrying amount Fair value amount Fair value

Long-term debt $ß6,056 $ß6,590 $ß6,172 $ß6,656

136 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 5

(i) Recognition of derivative gains and losses The following table sets out the gains and losses, excluding tax effects, on derivative instruments classified as cash flow hedging items and their location within the Consolidated Statements of Income and Other Comprehensive Income.

Gain (loss) reclassified from other comprehensive Amount of gain (loss) recognized income into income (effective portion) (Note 19(b)) in other comprehensive income (effective portion) (Note 19(b)) Amount

Years ended December 31 (millions) 2010 2009 Location 2010 2009

Derivatives used to manage currency risks – Associated with U.S. dollar denominated debt(1) $ß 9 $ß(259) Financing costs $ß(59) $ß(357) – Arising from U.S. dollar denominated purchases (1) (6) Operations – 1 Derivatives used to manage changes in share-based compensation costs (Note 12(c)) 7 1 Operations – (6) $ß15 $ß(264) $ß(59) $ß(362)

(1) Including amounts arising from settlement of financial instruments used to manage the foreign exchange risk associated with redeemed U.S. dollar denominated debt (Note 8).

The following table sets out gains and losses arising from derivative instruments: that are classified as held for trading items; that are not designated as being in a hedging relationship; and their location within the Consolidated Statements of Income and Other Comprehensive Income.

Gain (loss) recognized in income on derivatives

Years ended December 31 (millions) Location 2010 2009

Derivatives used to manage currency risks Financing costs $ – $ß (13) Derivatives used to manage changes in share-based compensation costs (Note 12(b)) Operations 24 (4) $ 24 $ß (17)

TELUS 2010 annual report . 137 SEGMENTED INFORMATION Summary disclosure of segmented information regularly reported to the Company’s 6 chief operating decision-maker

The Company’s operating segments and reportable segments are the technical expertise required to deliver the products and services, Wireless and Wireline. The Wireless segment includes digital personal customer characteristics, the distribution channels used and regulatory communications services, equipment sales and wireless Internet services. treatment. Intersegment sales are recorded at the exchange value, The Wireline segment includes voice local, voice long distance, data which is the amount agreed to by the parties. (which includes TELUS TV) and other telecommunications services The Company does not have material revenues attributed, or capital excluding wireless. Segmentation is based on similarities in technology, assets and goodwill located, outside of Canada.

The following segmented information is regularly reported to the Company’s Chief Executive Officer (the Company’s chief operating decision-maker).

Wireless Wireline Eliminations Consolidated

Years ended December 31 (millions) 2010 2009 2010 2009 2010 2009 2010 2009

Operating revenues External revenue $ß5,014 $ß4,707 $ß4,765 $ß4,899 $ – $ – $ß9,779 $ß9,606 Intersegment revenue 33 28 155 134 (188) (162) – – $ß5,047 $ß4,735 $ß4,920 $ß5,033 $ß(188) $ß(162) $ß9,779 $ß9,606

EBITDA(1) $ß2,031 $ß1,933 $ß1,612 $ß1,558 $ – $ – $ß3,643 $ß3,491

CAPEX(2) $ 463 $ 770 $ß1,258 $ß1,333 $ – $ – $ß1,721 $ß2,103 EBITDA less CAPEX $ß1,568 $ß1,163 $ 354 $ 225 $ – $ – $ß1,922 $ß1,388 Operating revenues (above) $ß9,779 $ß9,606 Operations 6,062 5,925 Restructuring costs 74 190 EBITDA (above) 3,643 3,491 Depreciation 1,333 1,341 Amortization 402 381 Operating income 1,908 1,769 Other expense, net 32 32 Financing costs 510 532 Income before income taxes 1,366 1,205 Income taxes 328 203 Net income $ß1,038 $ß1,002

(1) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a measure that does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers; EBITDA is defined by the Company as operating revenues less operations expense and restructuring costs. The Company has issued guidance on, and reports, EBITDA because it is a key measure used by management to evaluate performance of its business segments and is utilized in measuring compliance with certain debt covenants. (2) Total capital expenditures (CAPEX).

138 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 6–8

RESTRUCTURING COSTS 7 Summary continuity schedule and review of restructuring costs

Years ended December 31 (millions) 2010 2009 In 2010 ongoing efficiency initiatives include: Restructuring costs . simplifying or automating processes to achieve operating Workforce efficiencies, which includes workforce reductions; Voluntary $ß 39 $ß 94 . simplifying organizational structures through consolidation Involuntary 25 92 of functions and reducing organizational layers; Other 10 4 . consolidating administrative real estate to create a smaller 74 190 environmental footprint through mobile working, encouraging less inter-city travel, reduced daily commutes, and lower use Disbursements Workforce of real estate space, which includes vacating premises; Voluntary 42 36 . decommissioning uneconomic products and services; and Involuntary and other 61 66 . leveraging business process outsourcing and off-shoring Other 2 4 to the Company’s own international call centres. 105 106 These initiatives were aimed to improve the Company’s long-term operating productivity and competitiveness. The Company’s estimate Expenses greater (less) than disbursements (31) 84 of restructuring costs for 2011 is approximately $50 million. Other 7 – Change in restructuring accounts payable and accrued liabilities (24) 84 Restructuring accounts payable and accrued liabilities Balance, beginning of period 135 51 Balance, end of period $ß111 $ß135

FINANCING COSTS 8 Summary schedule of items comprising financing costs by nature

Years ended December 31 (millions) 2010 2009

Interest expense Interest on long-term debt $ß442 $ß474 Interest on short-term obligations and other 21 9 Loss on redemption of long-term debt(1) 52 99 515 582 Foreign exchange (1) (3) 514 579 Interest income Interest on tax refunds (2) (46) Other interest income (2) (1) (4) (47) $ß510 $ß532

(1) This amount includes a loss of $16 (2009 – $36) which arose from the associated settlement of financial instruments that were used to manage the foreign exchange rate risk associated with the U.S. dollar denominated debt that was redeemed during the third quarter (2009 – fourth quarter), as discussed in Note 18(b).

TELUS 2010 annual report . 139 INCOME TAXES Summary reconciliations of statutory rate income tax expense to provision 9 for income taxes and analyses of future income tax liability

Years ended December 31 (millions) 2010 2009 The Company expects to be able to utilize its non-capital losses Current $ß115 $ß286 prior to expiry. Future 213 (83) The Company has net capital losses and such losses may only be applied against realized taxable capital gains. The Company expects to $ß328 $ß203 include a net capital loss carry-forward of $5 million (2009 – $605 million) The Company’s income tax expense differs from that calculated by in its Canadian income tax returns. Of the net capital losses carried- applying statutory rates for the following reasons: forward as at December 31, 2009, $604 million has been denied on audit by the Canada Revenue Agency and the Company will no longer pursue Years ended December 31 ($ in millions) 2010 2009 such net capital losses. During the year ended December 31, 2010, the Basic blended federal and Company recognized the benefit of $1 million (2009 – $1 million) in net provincial tax at statutory capital losses. income tax rates $ß396 29.0% $ß366 30.3% The Company conducts research and development activities, Revaluation of future income tax which are eligible to earn Investment Tax Credits. During the year ended liability to reflect future December 31, 2010, the Company recorded Investment Tax Credits of statutory income tax rates (43) (99) $20 million (2009 – $15 million). Of the Investment Tax Credits recorded Tax rate differential on, and by the Company during the year ended December 31, 2010, $15 mil- consequential adjustments lion (2009 – $10 million) of which was recorded as a reduction of capital from, reassessment and the balance of which was recorded as a reduction of Operations of prior year tax issues (36) (68) expense. Share option award compensation 10 4 Other 1 – Commencing in 2011, Canadian generally accepted accounting principles for publicly accountable enterprises require the separate dis- Income tax expense per closure of temporary differences arising from the carrying value of the Consolidated Statements investment in subsidiaries and partnerships exceeding their tax base and of Income and Other Comprehensive Income $ß328 24.0% $ß203 16.8% for which no future income tax liabilities have been recognized. In the Company’s specific instance this is relevant to its investment in Canadian The Company must make significant estimates in respect of the subsidiaries and Canadian partnerships. The Company is not required composition of its future income tax liability. The operations of the to recognize such future income tax liabilities as it is in a position to Company are complex and the related tax interpretations, regulations control the timing and manner of the reversal of the temporary differ- and legislation are continually changing. As a result, there are usually ences, which would not be expected to be exigible to income tax, and some tax matters in question. Temporary differences comprising it is probable that such differences will not reverse in the foreseeable the future income tax liability are estimated as follows: future. Although the Company is in a position to control the timing and reversal of temporary differences in respect of its non-Canadian sub- As at December 31 (millions) 2010 2009 sidiaries, and it is not probable that such differences will reverse in the Property, plant and equipment and intangible foreseeable future, it does recognize all potential taxes for repatriation assets subject to amortization $ (282) $ (209) of substantially all unremitted earnings in non-Canadian subsidiaries. Intangible assets with indefinite lives (835) (789) Partnership income unallocated for income tax purposes (398) (437) Net pension and share-based compensation amounts (408) (327) Reserves not currently deductible 70 124 Losses available to be carried forward 35 40 Other (28) (15) $ß(1,846) $ß(1,613) Presented on the Consolidated Statements of Financial Position as: Future income tax liability Current $ (348) $ (294) Non-current (1,498) (1,319) Net future income tax asset (liability) $ß(1,846) $ß(1,613)

140 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 9–11

PER SHARE AMOUNTS Summary schedule and review of numerators and denominators 10 used in calculating per share amounts and related disclosures

Basic net income per Common Share and Non-Voting Share is Years ended December 31 (millions) 2010 2009 calculated by dividing net income attributable to Common Shares Basic total weighted average Common Shares and Non-Voting Shares by the total weighted average Common and Non-Voting Shares outstanding 320 318 Shares and Non-Voting Shares outstanding during the period. Diluted Effect of dilutive securities net income per Common Share and Non-Voting Share is calculated Share option awards 1 – to give effect to share option awards. Diluted total weighted average Common Shares The following table presents the reconciliations of the denominators and Non-Voting Shares outstanding 321 318 of the basic and diluted per share computations. Net income attributable to Common Shares and Non-Voting Shares equalled For the year ended December 31, 2010, certain outstanding share diluted income attributable to Common Shares and Non-Voting option awards, in the amount of 5 million (2009 – 8 million) were not Shares for all periods presented. included in the computation of diluted income per Common Share and Non-Voting Share because the share option awards’ exercise prices were greater than the average market price of the Common Shares and Non-Voting Shares during the reported periods.

DIVIDENDS PER SHARE 11 Summary schedule of dividends declared

(a) Dividends declared

Years ended December 31 2010 2009

Declared Paid to Declared Paid to (millions except per share amounts) effective shareholders Total effective shareholders Tot a l

Dividend per Common Share and Non-Voting Share Dividend $0.475 (2009 – $0.475) Mar. 11, 2010 Apr. 1, 2010 $ß152 Mar. 11, 2009 Apr. 1, 2009 $ß151 Dividend $0.50 (2009 – $0.475) June 10, 2010 July 2, 2010 161 June 10, 2009 July 2, 2009 149 Dividend $0.50 (2009 – $0.475) Sept. 10, 2010 Oct. 1, 2010 160 Sept. 10, 2009 Oct. 1, 2009 151 Dividend $0.525 (2009 – $0.475) Dec. 10, 2010 Jan. 4, 2011 169 Dec. 11, 2009 Jan. 4, 2010 150 $ß642 $ß601

Years ended December 31 (millions) 2010 2009

Dividends declared in Dividends declared in

Prior Current Prior Current fiscal year fiscal year Total fiscal year fiscal year Tot a l

Common Share and Non-Voting Share dividends Payable, beginning of period $ß150 $ß – $ß150 $ß151 $ß – $ß151 Declared n.a. 642 642 n.a. 601 601 Paid in cash (129) (344) (473) (151) (451) (602) Re-invested in Non-Voting Shares issued from Treasury (21) (129) (150) – – – Payable, end of period $ß – $ß169 $ß169 $ß – $ß150 $ß150

On February 8, 2011, the Board of Directors declared a quarterly amount of the dividend payment depends upon the number of Common dividend of $0.525 per share on the issued and outstanding Common Shares and Non-Voting Shares issued and outstanding at the close of Shares and Non-Voting Shares of the Company payable on April 1, 2011, business on March 11, 2011. to holders of record at the close of business on March 11, 2011. The final

TELUS 2010 annual report . 141 (b) Dividend Reinvestment and Share Purchase Plan price. During the year ended December 31, 2010, in respect of dividends The Company has a Dividend Reinvestment and Share Purchase Plan reinvested, the Company issued Non-Voting Shares from Treasury at a under which eligible holders of Common Shares and Non-Voting Shares discount of 3%. In respect of Common Share and Non-Voting Share divi- may acquire Non-Voting Shares through the reinvestment of dividends dends declared during the year ended December 31, 2010, $183 million and making additional optional cash payments to the trustee. Under (2009 – $36 million) was to be reinvested in Non-Voting Shares. this Plan, the Company has the option of offering shares from Treasury Optional cash payments: Shares purchased through optional cash or having the trustee acquire shares in the stock market. payments are subject to a minimum investment of $100 per transaction Reinvestment of dividends: The Company, at its discretion, may and a maximum investment of $20,000 per calendar year. offer the Non-Voting Shares at up to a 5% discount from the market

SHARE-BASED COMPENSATION Summary schedules and review of compensation arising from share option awards, 12 restricted stock units and employee share purchase plan

(a) Details of share-based compensation expense Reflected in the Consolidated Statements of Income and Other Comprehensive Income as Operations expense and in the Consolidated Statements of Cash Flows are the following share-based compensation amounts:

Years ended December 31 2010 2009

Associated Statement of Associated Statement of Operations operating cash flows Operations operating cash flows (millions) expense cash outflows adjustment expense cash outflows adjustment

Share option awards(1) $ß 1 $ß(24) $ß(23) $ß11 $ß(26) $ß(15) Restricted stock units(2) 29 (36) (7) 29 (37) (8) Employee share purchase plan 27 (27) – 29 (29) – $ß57 $ß(87) $ß(30) $ß69 $ß(92) $ß(23)

(1) The expense (recovery) arising from share options with the net-cash settlement feature, net of cash-settled equity swap agreement effects (see Note 5(i)), was $(10) (2009 – $(2)). (2) The expense arising from restricted stock units was net of cash-settled equity swap agreement effects (see Note 5(i)).

For the year ended December 31, 2010, the associated operating Share option awards accounted for as equity instruments: cash outflows in respect of share option awards include cash outflows The weighted average fair value of share option awards granted, and arising from the cash-settled equity swap agreements of $18 million the weighted average assumptions used in the fair value estimation (2009 – $19 million). Similarly, for the year ended December 31, 2010, at the time of grant, using the Black-Scholes model (a closed-form option the associated operating cash outflows in respect of restricted stock pricing model), are as follows: units include cash outflows arising from the cash-settled equity swap Years ended December 31 2010 2009 agreements of $4 million (2009 – $15 million). For the year ended Share option award fair value (per share option) $ß 4.30 $ß 3.64 December 31, 2010, the income tax benefit arising from share-based Risk free interest rate 2.5% 2.3% compensation was $6 million (2009 – $18 million); as disclosed in Expected lives(1) (years) 4.5 4.5 Note 9, not all share-based compensation amounts are deductible Expected volatility 26.3% 26.0% for income tax purposes. Dividend yield 5.8% 6.2%

(1) The maximum contractual term of the share option awards granted in 2010 and 2009 (b) Share option awards was seven years. General: The Company applies the fair value based method of accounting for share-based compensation awards granted to employees. The risk free interest rate used in determining the fair value of the The Company uses share option awards as a form of retention and share option awards is based on a Government of Canada yield curve incentive compensation. Share option awards typically vest over a three- that is current at the time of grant. The expected lives of the share option year period (the requisite service period), but may vest over periods awards are based on historical share option award exercise data of the of up to five years. The vesting method of share option awards, which is Company. Similarly, expected volatility considers the historical volatility determined on or before the date of grant, may be either cliff or graded; of the Company’s Non-Voting Shares. The dividend yield is the annual- all share option awards granted subsequent to 2004 have been cliff- ized dividend current at the date of grant divided by the share option vesting awards. award exercise price. Dividends are not paid on unexercised share option awards and are not subject to vesting. Had the weighted average assumptions for grants of share option awards that are reflected in the expense disclosures above been varied by 10% and 20% changes, the compensation cost arising from share

142 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 12

option awards for the year ended December 31, 2010, would have varied Some share option awards have a net-equity settlement feature. as follows: As discussed further in Note 19(c), it is at the Company’s option Hypothetical change whether the exercise of a share option award is settled as a share in assumptions(1) ($ in millions) 10% 20% option or settled using the net-equity settlement feature. Share option awards accounted for as liability instruments: Risk free interest rate $ – $ 1 Substantially all of the Company’s outstanding share option awards Expected lives (years) $ – $ 1 Expected volatility $ 1 $ 3 that were granted prior to January 1, 2005, have a net-cash settlement Dividend yield $ 1 $ 1 feature; the optionee has the choice of exercising the net-cash settle- ment feature. The affected outstanding share option awards largely (1) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in a decreased amount, and take on the characteristics of liability instruments rather than equity unfavourable hypothetical changes in the assumptions result in an increased amount, instruments. For the outstanding share option awards that were of the compensation cost arising from share option awards. As the figures indicate, amended and which were granted subsequent to 2001, the minimum changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in expense recognized for them will be their grant-date fair values. fair value may not be linear; in particular, variations in expected lives are constrained The Company entered into a cash-settled equity swap agreement by vesting periods and legal lives. Also, in this table, the effect of a variation in a particular assumption on the amount of the compensation cost arising from share that establishes a cap on the Company’s cost associated with substan- option awards is calculated without changing any other assumption; in reality, tially all of the affected outstanding share option awards. The following changes in one factor may result in changes in another (for example, increases table sets out the number of affected outstanding share option awards in risk free interest rates may result in increased dividend yields), which might magnify or counteract the sensitivities. and the composition of their capped exercise date fair values.

Weighted average Associated Incremental Exercise notional expense date fair value amount of arising from capped by cash-settled net-cash cash-settled Affected share Aggregate equity swap As at December 31, 2010 ($ in millions except Exercise Grant-date settlement equity swap option awards intrinsic agreement per affected outstanding share option award) price fair value feature agreement outstanding value(1) (Note 5(h))

Affected share option awards granted for Non-Voting Shares prior to 2002 $ß29.98 n.a.(2) $ß25.17 $ß55.15 834,826 $ß11 $ß43 Non-Voting Shares after 2001 $ß22.28 $ß7.08 $ß25.79 $ß55.15 333,119 7 17 1,167,945 $ß18 $ß60

(1) The aggregate intrinsic value is calculated upon December 31, 2010, per share price of $43.25 for Non-Voting Shares. The difference between the aggregate intrinsic value amount in this table and the amount disclosed in Note 21(b) is the effect, if any, of recognizing no less than the expense arising from the grant-date fair values for the affected share option awards outstanding. (2) As discussed in Note 1(k), Canadian GAAP did not require that grant-date fair values be determined for share option awards made prior to 2002.

(c) Restricted stock units of the restricted stock unit. The restricted stock units become payable The Company uses restricted stock units as a form of incentive com- when vesting is completed. The restricted stock units typically vest pensation. Each restricted stock unit is equal in value to one Non-Voting over a period of 33 months (the requisite service period). The vesting Share and the dividends that would have arisen thereon had it been method of restricted stock units, which is determined on or before an issued and outstanding Non-Voting Share; the notional dividends are the date of grant, may be either cliff or graded. The associated liability recorded as additional issuances of restricted stock units during the life is normally cash-settled.

The following table presents a summary of the activity related to the Company’s restricted stock units.

Years ended December 31 2010 2009

Weighted Weighted Number of restricted stock units Number of restricted stock units average grant- average grant- Non-vested Vested date fair value Non-vested Vested date fair value

Outstanding, beginning of period Non-vested 1,385,091 – $ß37.76 1,506,370 – $ß48.15 Vested – 24,226 37.03 – 26,885 50.10 Issued Initial award 754,057 – 33.82 641,404 – 30.78 In lieu of dividends 90,384 44 40.18 110,637 169 32.23 Vested (771,417) 771,417 43.11 (706,893) 706,893 52.52 Settled in cash – (770,998) 43.28 – (709,721) 52.95 Forfeited and cancelled (99,049) – 36.89 (166,427) – 45.15 Outstanding, end of period Non-vested 1,359,066 – $ß32.46 1,385,091 – $ß37.76 Vested – 24,689 31.86 – 24,226 37.03

TELUS 2010 annual report . 143 With respect to certain issuances of restricted stock units, the Company entered into cash-settled equity forward agreements that fix the cost to the Company; that information, as well as a schedule of the Company’s non-vested restricted stock units outstanding as at December 31, 2010, is set out in the following table. Number of Cost fixed to Number of Total number fixed-cost the Company variable-cost of non-vested restricted per restricted restricted restricted stock units stock unit stock units stock units

Vesting in years ending December 31: 2 011 390,000 $ß33.79 50,000 $ß44.43 440,000 184,857 624,857 2012 420,000 $ß35.91 100,000 $ß46.01 520,000 214,209 734,209 960,000 399,066 1,359,066

(d) Employee share purchase plan (e) Unrecognized, non-vested share-based The Company has an employee share purchase plan under which eligible compensation employees up to a certain job classification can purchase Common As at December 31, 2010, compensation cost related to non-vested Shares through regular payroll deductions by contributing between 1% share-based compensation that has not yet been recognized is set out and 10% of their pay; for more highly compensated job classifications, in the following table and is expected to be recognized over a weighted employees may contribute between 1% and up to 55% of their pay. average period of 1.7 years (2009 – 1.6 years).

For every dollar contributed by an employee, up to a maximum of 6% As at December 31 (millions)(1) 2010 2009 of eligible employee pay, the Company is required to contribute a Share option awards $ß 9 $ß12 percentage between 20% and 40% as designated by the Company. Restricted stock units(2) 27 22 For the year ended December 31, 2010, the Company contributed 40% (2009 – 40%) for employees up to a certain job classification; for $ß36 $ß34 more highly compensated job classifications, the Company contributed (1) These disclosures are not likely to be representative of the effects on reported net 35% (2009 – 35%). The Company records its contributions as a com- income for future periods for the following reasons: these amounts reflect an estimate of forfeitures; these amounts do not reflect any provision for future awards; these ponent of operating expenses and, prior to fiscal 2010, there were no amounts do not reflect any provision for changes in the intrinsic value of vested vesting requirements. Subsequent to 2009, the Company’s contribution restricted stock units; these amounts do not reflect any provision for the impacts of future, if any, modification of share option awards allowing for net-cash settlement; vests on the earlier of a plan participant’s last day in the Company’s and for non-vested restricted stock units, these amounts reflect intrinsic values as employ or the last business day of the calendar year of the Company’s at the statement of financial position dates. contribution, unless the plan participant’s employment was terminated (2) The compensation cost that has not yet been recognized in respect of non-vested restricted stock units is calculated based upon the intrinsic value of the non-vested with cause, in which case the plan participant will forfeit their in-year restricted stock units as at the statement of financial position dates, net of the Company contribution. impacts of associated cash-settled equity forward agreements.

Years ended December 31 (millions) 2010 2009

Employee contributions $ß 73 $ß 79 Company contributions 27 29 $ß100 $ß108

Under this plan, the Company has the option of offering shares from Treasury or having the trustee acquire shares in the stock market. For the years ended December 31, 2010 and 2009, all Common Shares issued to employees under the plan were purchased in the stock market at normal trading prices.

144 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 13

EMPLOYEE FUTURE BENEFITS 13 Summary schedules and review of employee future benefits and related disclosures

The Company has a number of defined benefit and defined contri- Other defined benefit pension plans: In addition to the foregoing bution plans providing pension, other retirement and post-employment plans, the Company has non-registered, non-contributory supplementary benefits to most of its employees. Other benefit plans include a defined benefit pension plans which have the effect of maintaining the TELUS Québec Inc. retiree healthcare plan. The benefit plan(s) in which earned pension benefit once the allowable maximums in the registered an employee is a participant reflects the general development of plans are attained. As is common with non-registered plans of this the Company. nature, these plans are funded only as benefits are paid. Pension Plan for Management and Professional Employees of The Company has three contributory, non-indexed pension plans TELUS Corporation: This defined benefit pension plan, which ceased arising from a pre-merger acquisition which comprise less than 1% accepting new participants on January 1, 2006, and which comprises of the Company’s total accrued benefit obligation; these plans ceased approximately one-quarter of the Company’s total accrued benefit accepting new participants in September 1989. obligation, provides a non-contributory base level of pension benefits. Other defined benefit plans: Other defined benefit plans, which Additionally, on a contributory basis, employees can annually choose are all non-contributory, are comprised of a disability income plan, increased and/or enhanced levels of pension benefits over the base level a healthcare plan for retired employees and a life insurance plan. of pension benefits. At an enhanced level of pension benefits, the defined The healthcare plan for retired employees and the life insurance plan benefit pension plan has indexation of 100% of a specified cost-of-living ceased accepting new participants effective January 1, 1997. In con- index, to an annual maximum of 2%. Pensionable remuneration is deter- nection with the collective agreement signed in 2005, an external mined by the annualized average of the best sixty consecutive months. supplier commenced providing a new long-term disability plan effective TELUS Corporation Pension Plan: Management and professional January 1, 2006. The existing disability income plan will continue employees in Alberta who joined the Company prior to January 1, 2001, to provide payments to previously approved claimants and qualified and certain unionized employees are covered by this contributory defined eligible employees. benefit pension plan, which comprises slightly more than one-half of Telecommunication Workers Pension Plan: Certain employees the Company’s total accrued benefit obligation. The plan contains a in British Columbia are covered by a negotiated-cost, target-benefit supplemental benefit account which may provide indexation up to 70% union pension plan. Contributions are determined in accordance of the annual change of a specified cost-of-living index and pensionable with provisions of negotiated labour contracts and are generally based remuneration is determined by the average of the best five years in on employee gross earnings. the last ten years preceding retirement. British Columbia Public Service Pension Plan: Certain employees TELUS Québec Defined Benefit Pension Plan: Any employee not in British Columbia are covered by a public service pension plan. governed by a collective agreement in Quebec who joined the Company Contributions are determined in accordance with provisions of labour prior to April 1, 2006, any non-supervisory employee governed by a contracts negotiated by the Province of British Columbia and are collective agreement prior to September 6, 2006, and certain other generally based on employee gross earnings. unionized employees are covered by this contributory defined benefit Defined contribution pension plan: Effective January 1, 2007, the pension plan, which comprises approximately one-tenth of the Company offered one defined contribution pension plan, which is Company’s total accrued benefit obligation. The plan has no indexation contributory, and is the only Company-sponsored pension plan avail- and pensionable remuneration is determined by the average of the able to non-unionized and certain unionized employees joining the best four years. Company after that date. Generally, employees can annually choose to TELUS Edmonton Pension Plan: This contributory defined benefit contribute to the plan at a rate of between 3% and 6% of their pension- pension plan ceased accepting new participants on January 1, 1998. able earnings. The Company will match 100% of the contributions Indexation is 60% of the annual change of a specified cost-of-living index of the employees up to 5% of their pensionable earnings and will match and pensionable remuneration is determined by the annualized average 80% of employee contributions greater than that. Membership in the of the best sixty consecutive months. defined contribution pension plan is voluntary until an employee’s third year service anniversary. In the event that annual contributions exceed allowable maximums, excess amounts are contributed to a non-registered supplementary defined contribution pension plan.

TELUS 2010 annual report . 145 (a) Defined benefit plans Information concerning the Company’s defined benefit plans, in aggregate, is as follows:

Pension benefit plans Other benefit plans

(millions) 2010 2009 2010 2009

Accrued benefit obligation: Balance at beginning of year $ß6,376 $ß5,243 $ 71 $ 64 Current service cost 103 85 – – Interest cost 368 374 5 5 Benefits paid (c) (341) (318) (5) (5) Actuarial loss (gain) 452 991 4 7 Plan amendments – 1 – – Balance at end of year (d)-(e) 6,958 6,376 75 71 Plan assets (g): Fair value at beginning of year 6,316 5,654 30 34 Actual return on plan assets 623 767 1 – Employer contributions (j) 137 179 3 1 Employees’ contributions 30 34 – – Benefits paid (c) (341) (318) (5) (5) Fair value at end of year 6,765 6,316 29 30 Funded status – plan surplus (deficit) (193) (60) (46) (41) Unamortized net actuarial loss (gain) 1,726 1,528 4 (1) Unamortized past service costs 27 31 – – Unamortized transitional obligation (asset) (58) (106) – – Accrued benefit asset (liability) $ß1,502 $ß1,393 $ß(42) $ß(42)

The accrued benefit asset (liability) is reflected in the Consolidated Statements of Financial Position as follows:

As at December 31 (millions) 2010 2009

Pension benefit plans $ß1,502 $ß1,393 Other benefit plans (42) (42) $ß1,460 $ß1,351 Presented in the Consolidated Statements of Financial Position as: Deferred charges (Note 21(b)) $ß1,683 $ß1,565 Other long-term liabilities (Note 21(b)) (223) (214) $ß1,460 $ß1,351

The measurement date used to determine the plan assets and accrued benefit obligation was December 31.

(b) Defined benefit plans – cost The Company’s total net defined benefit plan costs were as follows:

Years ended December 31 2010 2009

Incurred Matching Recognized Incurred Matching Recognized (millions) in period adjustments(1) in period in period adjustments(1) in period

Pension benefit plans Current service cost (employer portion) $ß 73 $ – $ß 73 $ß 51 $ – $ß 51 Interest cost 368 – 368 374 – 374 Return on plan assets (623) 169 (454) (767) 364 (403) Past service costs – 4 4 – 3 3 Actuarial loss 452 (367) 85 991 (954) 37 Amortization of transitional asset – (48) (48) – (44) (44) $ß270 $ß(242) $ß 28 $ß649 $ß(631) $ß 18

(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of employee future benefits.

146 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 13

Years ended December 31 2010 2009

Incurred Matching Recognized Incurred Matching Recognized (millions) in period adjustments(1) in period in period adjustments(1) in period

Other benefit plans Interest cost $ 5 $ – $ 5 $ß 5 $ – $ß5 Return on plan assets (1) – (1) – (1) (1) Actuarial loss (gain) 4 (5) (1) 7 (10) (3) Amortization of transitional obligation – – – – 1 1 $ 8 $ß(5) $ 3 $ß12 $ß(10) $ß2

(1) Accounting adjustments to allocate costs to different periods so as to recognize the long-term nature of employee future benefits.

(c) Benefit payments Estimated future benefit payments from the Company’s defined benefit plans, calculated as at December 31, 2010, are as follows:

Pension Other Years ending December 31 (millions) benefit plans benefit plans

2 011 $ 353 $ß 6 2012 367 6 2013 383 6 2014 400 5 2015 416 5 2016–2020 2,254 24

(d) Disaggregation of defined benefit pension plan funding status Accrued benefit obligations are the actuarial present values of benefits attributed to employee services rendered to a particular date. The Company’s disaggregation of defined benefit pension plans surplus and deficits at year-end are as follows:

As at December 31 2010 2009

Accrued Funded Accrued Funded benefit status – plan benefit status – plan (millions) obligation Plan assets surplus (deficit) obligation Plan assets surplus (deficit)

Pension plans that have plan assets in excess of accrued benefit obligations $ß4,328 $ß4,515 $ 187 $ß3,544 $ß3,799 $ß255 Pension plans that have accrued benefit obligations in excess of plan assets Funded 2,401 2,250 (151) 2,627 2,517 (110) Unfunded 229 – (229) 205 – (205) 2,630 2,250 (380) 2,832 2,517 (315) (see (a)) $ß6,958 $ß6,765 $ß(193) $ß6,376 $ß6,316 $ (60)

As at December 31, 2010 and 2009, undrawn Letters of Credit, further discussed in Note 18(d), secured certain of the unfunded defined benefit pension plans.

(e) Disaggregation of other defined benefit plan funding status Accrued benefit obligations are the actuarial present values of benefits attributed to employee services rendered to a particular date. The Company’s disaggregation of other defined benefit plans surplus and deficits at year-end are as follows:

As at December 31 2010 2009

Accrued Funded Accrued Funded benefit status – plan benefit status – plan (millions) obligation Plan assets surplus (deficit) obligation Plan assets surplus (deficit)

Other benefit plan that has plan assets in excess of accrued benefit obligations $ß27 $ß29 $ 2 $ß27 $ß30 $ 3 Unfunded other benefit plans that have accrued benefit obligations in excess of plan assets 48 – (48) 44 – (44) (see (a)) $ß75 $ß29 $ß(46) $ß71 $ß30 $ß(41)

TELUS 2010 annual report . 147 (f) Accumulated pension benefit obligations Accumulated benefit obligations differ from accrued benefit obligations in that accumulated benefit obligations do not include assumptions about future compensation levels. The Company’s disaggregation of defined pension benefit plans accumulated benefit obligations and plan assets at year-end are as follows:

As at December 31 2010 2009

Accumulated Accumulated benefit benefit (millions) obligation Plan assets Difference obligation Plan assets Difference

Pension plans that have plan assets in excess of accumulated benefit obligations $ß5,857 $ß6,209 $ß352 $ß5,353 $ß5,794 $ß441 Pension plans that have accumulated benefit obligations in excess of plan assets Funded 599 556 (43) 545 522 (23) Unfunded 210 – (210) 189 – (189) 809 556 (253) 734 522 (212) $ß6,666 $ß6,765 $ß 99 $ß6,087 $ß6,316 $ß229

(g) Plan investment strategies and policies of BC TELECOM Inc. and TELUS Corporation, the Company’s prede- The Company’s primary goal for the defined benefit plans is to ensure cessors. Externally managed funds are permitted to invest in securities the security of the retirement income and other benefits of the plan of the Company, provided that the investments are consistent with the members and their beneficiaries. A secondary goal of the Company is funds’ mandate and are in compliance with the relevant SIP&P. to maximize the long-term rate of return of the defined benefit plans’ Diversification: The Company’s strategy for equity security invest- assets within a level of risk acceptable to the Company. ments is to be broadly diversified across individual securities, industry Risk management: The Company considers absolute risk (the risk sectors and geographical regions. A meaningful portion (15–25% of contribution increases, inadequate plan surplus and unfunded obli- of total plans’ assets) of the investment in equity securities is allocated gations) to be more important than relative return risk. Accordingly, the to foreign equity securities with the intent of further increasing the defined benefit plans’ designs, the nature and maturity of defined benefit diversification of the plans’ assets. Debt securities may include a mean- obligations and characteristics of the plans’ memberships significantly ingful allocation to mortgages with the objective of enhancing cash influence investment strategies and policies. The Company manages risk flow and providing greater scope for the management of the bond through specifying allowable and prohibited investment types, setting component of the plans’ assets. Debt securities also may include real diversification strategies and determining target asset allocations. return bonds to provide inflation protection, consistent with the indexed Allowable and prohibited investment types: Allowable and prohibited nature of some defined benefit obligations. Real estate investments investment types, along with associated guidelines and limits, are are used to provide diversification of plans’ assets, potential long-term set out in each fund’s Pension Benefits Standards Act, 1985, required inflation hedging and comparatively stable investment income. Statement of Investment Policies and Procedures (SIP&P), which is Relationship between plan assets and benefit obligations: With the reviewed and approved annually by the designated governing fiduciary. objective of lowering its long-term costs of defined benefit plans, the The SIP&P guidelines and limits are further governed by the Pension Company purposely mismatches plan assets and benefit obligations. Benefits Standards Regulations, 1985’s permitted investments and This mismatching is implemented by including equity investments in the lending limits. As well as conventional investments, each fund’s SIP&P long-term asset mix as well as fixed income securities and mortgages may provide for the use of derivative products to facilitate investment with durations that differ from the benefit obligations. Compensation operations and to manage risk provided that no short position is for liquidity issues that may have otherwise arisen from mismatching of taken, no use of leverage is made and there is no violation of guidelines plan assets and benefit obligations comes from broadly diversified and limits established in the SIP&P. Internally managed funds are pro- investment holdings (including cash and short-term investment holdings) hibited from increasing grandfathered investments in securities of the and cash flows from dividends, interest and rents from diversified Company; grandfathered investments were made prior to the merger investment holdings.

Asset allocations: Information concerning the Company’s defined benefit plans’ target asset allocation and actual asset allocation is as follows:

Pension benefit plans Other benefit plans

Target Percentage of plan assets Target Percentage of plan assets allocation at end of year allocation at end of year

2 011 2010 2009 2 011 2010 2009

Equity securities 45–60% 56% 53% – – – Debt securities 35–45% 38% 41% – – – Real estate 4–8% 6% 6% – – – Other 0–2% – – 100% 100% 100% 100% 100% 100% 100% 100%

148 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 13

(h) Fair value measurements – pension benefit plans Information about the fair value measurements of the Company’s defined benefit pension plans’ assets, in aggregate, is as follows:

Fair value measurements at reporting date using

Quoted prices in active Significant other Significant markets for identical items observable inputs unobservable inputs Tot a l (Level 1) (Level 2) (Level 3)

As at December 31 (millions) 2010 2009 2010 2009 2010 2009 2010 2009

Asset class Equity securities Canadian $ß2,174 $ß1,921 $ß1,790 $ß1,743 $ 384 $ 178 $ß – $ß – Foreign 1,589 1,415 1,122 969 412 380 55 66 Debt securities Debt securities issued by national, provincial or local governments 1,357 1,207 1,071 1,014 286 193 – – Corporate debt securities 558 620 – – 558 620 – – Asset-backed securities 54 45 – – 54 45 – – Commercial mortgages 218 312 – – – – 218 312 Cash and cash equivalents 386 389 17 25 369 364 – – Real estate 429 393 51 45 – – 378 348 Other – 14 – – – 14 – – $ß6,765 $ß6,316 $ß4,051 $ß3,796 $2,063 $ß1,794 $ß651 $ß726

At December 31, 2010, shares of TELUS Corporation accounted for less than 1% of the assets held in the pension and other benefit trusts administered by the Company. The changes in the years ended December 31, 2010 and 2009, of the fair value measurements of the Company’s defined benefit pension plans’ assets which use significant unobservable inputs, in aggregate, are as follows:

Asset class

Equity securities – foreign Commercial mortgages Real estate Tot a l

Year ended December 31 (millions) 2010 2009 2010 2009 2010 2009 2010 2009

Balance, beginning of year $ß66 $ß80 $ß312 $ß285 $ß348 $ß320 $ß726 $ß685 Actual return on plan assets relating to assets: Still held at reporting date (19) (18) 1 17 (13) (13) (31) (14) Sold during the period – – (3) 6 – – (3) 6 Purchases, sales and settlements 8 4 (92) 4 43 41 (41) 49 Transfers in and/or out of Level 3 – – – – – – – – Balance, end of year $ß55 $ß66 $ß218 $ß312 $ß378 $ß348 $ß651 $ß726

(i) Fair value measurements – other benefit plan significant unobservable inputs (Level 3). The changes in the years As at December 31, 2010 and 2009, the Company has only one other ended December 31, 2010 and 2009, of the fair value measurements of defined benefit plan and it had only one asset, an experience related the Company’s other defined benefit plan’s assets which use significant underwriting agreement, the fair value of which was determined using unobservable inputs are as follows:

Actual return on plan assets relating to assets Balance, Purchases, Transfers in beginning Still held at the Sold during sales and and/or out Balance, (millions) of year reporting date the period settlements of Level 3 end of year

Asset class Experience rated underwriting agreement(1) Year ended December 31, 2009 $ß34 $ß– $ß– $ß(4) $ß– $ß30 Year ended December 31, 2010 $ß30 $ß1 $ß– $ß(2) $ß– $ß29

(1) The effect of the experience rated underwriting agreement is that the Company’s contributions were transferred to an insurance company that in turn provides the other defined benefits.

TELUS 2010 annual report . 149 (j) Employer contributions The best estimates of fiscal 2011 employer contributions to the The determination of the minimum funding amounts for substantially Company’s defined benefit plans are approximately $298 million (including all of the Company’s registered defined benefit pension plans is governed a discretionary contribution of $200 million made in January 2011) for by the Pension Benefits Standards Act, 1985, which requires that, in defined benefit pension plans and $NIL for other defined benefit plans. addition to current service costs being funded, both going-concern and These estimates (other than for the non-recurring contribution of $200 mil- solvency valuations be performed on a specified periodic basis. lion made in January 2011) are based upon the mid-year 2010 annual . Any excess of plan assets over plan liabilities determined in the funding reports that were prepared by actuaries using December 31, 2009, going-concern valuation reduces the Company’s minimum funding actuarial valuations. The funding reports are based on the pension requirement of current service costs, but may not reduce the plans’ fiscal years, which are calendar years. The next annual funding requirement to an amount less than the employees’ contributions. valuations are expected to be prepared mid-year 2011. The going-concern valuation generally determines the excess (if any) of a plan’s assets over its liabilities, determined on a projected (k) Assumptions benefit basis. Management is required to make significant estimates about certain . As of the date of these consolidated financial statements, the actuarial and economic assumptions to be used in determining defined solvency valuation generally requires that a plan’s liabilities, deter- benefit pension costs, accrued benefit obligations and pension plan mined on the basis that the plan is terminated on the valuation assets. These significant estimates are of a long-term nature, which is date, in excess of its assets (if any) be funded, at a minimum, consistent with the nature of employee future benefits. in equal annual amounts over a period not exceeding five years. The discount rate, which is used to determine the accrued benefit In the latter half of 2009, the Canadian Federal Government obligation, is based on the yield on long-term, high-quality fixed term announced proposals that would, among other things, affect the investments, and is set annually. The expected long-term rate of return solvency funding methodology for pension plans governed by is based upon forecasted returns of the major asset categories and the Pension Benefits Standards Act, 1985; the impact of these weighted by the plans’ target asset allocations. Future increases proposals, if any, on the Company will depend upon the final in compensation are based upon the current benefits policies and enacted form of the proposals. economic forecasts.

The significant weighted average actuarial assumptions arising from these estimates and adopted in measuring the Company’s accrued benefit obligations are as follows: Pension benefit plans Other benefit plans

2010 2009 2010 2009

Discount rate used to determine: Net benefit costs for the year ended December 31 5.85% 7.25% 5.67% 7.11% Accrued benefit obligation as at December 31 5.25% 5.85% 4.97% 5.65% Expected long-term rate of return(1) on plan assets used to determine: Net benefit costs for the year ended December 31 7.25% 7.25% 2.50% 3.00% Accrued benefit obligation as at December 31 7.00% 7.25% 2.50% 2.50% Rate of future increases in compensation used to determine: Net benefit costs for the year ended December 31 3.00% 3.00% – – Accrued benefit obligation as at December 31 3.00% 3.00% – –

(1) The expected long-term rate of return is based upon forecasted returns of the major asset categories and weighted by the plans’ target asset allocations (see (g)). Forecasted returns arise from the Company’s ongoing review of trends, economic conditions, data provided by actuaries and updating of underlying historical information.

2010 sensitivity of key assumptions (year ended, or as at, December 31, 2010) Pension benefit plans Other benefit plans

Change in Change in Change in Change in (millions) obligation expense obligation expense

Impact of hypothetical 25 basis point decrease(1) in: Discount rate $ß219 $ß20 $ß1 $ß– Expected long-term rate of return on plan assets $ß16 $ß– Rate of future increases in compensation $ß 26 $ß 5 $ß– $ß–

(1) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in decreased amounts, and unfavourable hypothetical changes in the assumptions result in increased amounts, of the obligations and expenses. Changes in amounts based on a 25 basis point variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear. Also, in this table, the effect of a variation in a particular assumption on the change in obligation or change in expense is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in discount rates may result in increased expectations about the long-term rate of return on plan assets), which might magnify or counteract the sensitivities.

150 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 14

(l) Defined contribution plans The Company’s total defined contribution pension plan costs recognized were as follows:

Years ended December 31 (millions) 2010 2009

Union pension plan and public service pension plan contributions $ß27 $ß30 Other defined contribution pension plans 34 31 $ß61 $ß61

ACCOUNTS RECEIVABLE Summary schedule and review of arm’s-length securitization trust transactions 14 and related disclosures

On July 26, 2002, TELUS Communications Inc., a wholly owned Cash flows from the securitization were as follows: subsidiary of TELUS, entered into an agreement with an arm’s-length securitization trust associated with a major Schedule I bank under Years ended December 31 (millions) 2010 2009 which TELUS Communications Inc. is able to sell an interest in certain Cumulative proceeds from securitization, of its trade receivables up to a maximum of $500 million (2009 – beginning of period $ 500 $ 300 $500 million). This revolving-period securitization agreement had an Proceeds from new securitizations – 200 initial term ending July 18, 2007; a November 30, 2006, amendment Securitization reduction payments (100) – resulted in the term being extended to July 18, 2008; a March 31, 2008, Cumulative proceeds from securitization, amendment resulted in the term being extended to July 17, 2009; end of period $ 400 $ 500 and a May 6, 2009, amendment resulted in the term being extended Proceeds from collections reinvested to May 6, 2012. in revolving-period securitizations $ß4,235 $ß4,060 As a result of selling the interest in certain of the trade receivables on Proceeds from collections pertaining a fully serviced basis, a servicing liability is recognized on the date of sale to retained interest $ 720 $ 780 and is, in turn, amortized to earnings over the expected life of the trade receivables. The key economic assumptions used to determine the loss on sale TELUS Communications Inc. is required to maintain at least a BBB of receivables, the future cash flows and fair values attributed to the (low) credit rating by Dominion Bond Rating Service or the securitization retained interest were as follows: trust may require the sale program to be wound down prior to the end Years ended December 31 2010 2009 of the term. Expected credit losses as a percentage As at December 31 (millions) 2010 2009 of accounts receivable sold 1.0% 1.2% Total managed portfolio $ß1,322 $ß1,201 Weighted average life of the receivables Securitized receivables (465) (598) sold (days) 34 32 Retained interest in receivables sold 60 91 Effective annual discount rate 1.2% 0.8% Servicing 1.0% 1.0% Receivables held $ 917 $ 694

Generally, the sold trade receivables do not experience prepayments. For the year ended December 31, 2010, the Company recognized composite losses of $8 million (2009 – $11 million) on the sale of receivables arising from the securitization.

TELUS 2010 annual report . 151 At December 31, 2010, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% changes in those assumptions were as follows:

Hypothetical change December 31, in assumptions(1) ($ in millions) 2010 10% 20%

Carrying amount/fair value of future cash flows $ß60 Expected credit losses as a percentage of accounts receivable sold $ß– $ß1 Weighted average life of the receivables sold (days) $ß– $ß– Effective annual discount rate $ß– $ß–

(1) These sensitivities are hypothetical and should be used with caution. Favourable hypothetical changes in the assumptions result in an increased value, and unfavourable hypothetical changes in the assumptions result in a decreased value, of the retained interest in receivables sold. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in increased credit losses), which might magnify or counteract the sensitivities.

PROPERTY, PLANT AND EQUIPMENT 15 Summary schedule of items comprising property, plant and equipment

Buildings and Network leasehold Assets under Assets under (millions) assets improvements capital lease Other Land construction Tot a l

At cost As at January 1, 2009 $ 20,609 $ 2,110 $ 15 $ 1,681 $ 49 $ß 485 $ 24,949 Additions 406 21 – 42 – 1,283 1,752 Additions arising from business acquisitions – 2 – 7 – – 9 Dispositions and retirements (125) (28) (2) (124) – – (279) Reclassifications 1,160 139 – 38 – (1,337) – As at December 31, 2009 22,050 2,244 13 1,644 49 431 26,431 Additions 431 15 10 35 – 840 1,331 Dispositions and retirements (568) (13) (2) (182) – – (765) Reclassifications 675 105 – 53 – (833) – As at December 31, 2010 $ß22,588 $ß2,351 $ß21 $ß1,550 $ß49 $ 438 $ß26,997 Accumulated depreciation As at January 1, 2009 $ 15,119 $ 1,232 $ 9 $ 1,272 $ – $ß – $ 17,632 Depreciation 1,053 122 2 164 – – 1,341 Dispositions and retirements (120) (21) (2) (128) – – (271) As at December 31, 2009 16,052 1,333 9 1,308 – – 18,702 Depreciation 1,082 118 2 131 – – 1,333 Dispositions and retirements (568) (13) (1) (178) – – (760) Reclassifications (5) 5 – – – – – As at December 31, 2010 $ß16,561 $ß1,443 $ß10 $ß1,261 $ß – $ – $ß19,275 Net book value As at December 31, 2009 $ 5,998 $ß 911 $ 4 $ß 336 $ 49 $ß 431 $ 7,729

As at December 31, 2010 $ß 6,027 $ 908 $ß11 $ 289 $ß49 $ 438 $ß 7,722

152 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 15–16

INTANGIBLE ASSETS AND GOODWILL Summary schedule of intangible assets, including goodwill and review of reported 16 fiscal year acquisitions from which goodwill arose

(a) Intangible assets and goodwill, net

Intangible assets subject to amortization

Customer Intangible assets contracts and Tot a l with indefinite lives the related Access to Assets Tot a l intangible Subscriber customer rights-of-way under Spectrum Acquired intangible assets and (millions) base relationships Software and other construction Tot a l licences(1) brand Tot a l assets Goodwill(1) goodwill

At cost As at January 1, 2009 $ 245 $ 138 $ 2,082 $ 103 $ 197 $ 2,765 $ 4,867 $ ß– $ 4,867 $ 7,632 $ 3,928 $ 11,560 Additions – – 32 – 319 351 – – – 351 – 351 Additions arising from business acquisitions – – – – – – – 7 7 7 8 15 Dispositions and retirements – (1) (63) – – (64) – – – (64) – (64) Reclassifications – – 357 1 (358) – – – – – – – As at December 31, 2009 245 137 2,408 104 158 3,052 4,867 7 4,874 7,926 3,936 11,862 Additions – – 38 8 344 390 – – – 390 – 390 Dispositions and retirements – – (213) – – (213) – – – (213) – (213) Reclassifications – – 262 – (262) – – – – – – – As at December 31, 2010 $ß245 $ß137 $ß2,495 $ß112 $ß240 $ß3,229 $ß4,867 $ß7 $ß4,874 $ß8,103 $ß3,936 $ß12,039 Accumulated amortization As at January 1, 2009 $ 46 $ 13 $ 1,314 $ 75 $ – $ 1,448 $ 1,018 $ ß– $ 1,018 $ 2,466 $ß 364 $ 2,830 Amortization 6 14 360 1 – 381 – – – 381 – 381 Dispositions and retirements – – (69) – – (69) – – – (69) – (69) As at December 31, 2009 52 27 1,605 76 – 1,760 1,018 – 1,018 2,778 364 3,142 Amortization 6 14 378 4 – 402 – – – 402 – 402 Dispositions and retirements – – (211) – – (211) – – – (211) – (211) As at December 31, 2010 $ß 58 $ß 41 $ß1,772 $ß 80 $ß – $ß1,951 $ß1,018 $ß– $ß1,018 $ß2,969 $ 364 $ß 3,333 Net book value As at December 31, 2009 $ 193 $ 110 $ß 803 $ 28 $ 158 $ 1,292 $ 3,849 $ß7 $ 3,856 $ 5,148 $ 3,572 $ 8,720

As at December 31, 2010 $ß187 $ß 96 $ 723 $ß 32 $ß240 $ß1,278 $ß3,849 $ß7 $ß3,856 $ß5,134 $ß3,572 $ß 8,706

(1) Accumulated amortization of spectrum licences and goodwill is amortization recorded prior to 2002.

(b) Intangible assets subject to amortization (c) Intangible assets with indefinite lives – Estimated aggregate amortization expense for intangible assets subject to spectrum licences amortization, calculated upon such assets held as at December 31, 2010, The Company’s intangible assets with indefinite lives include spectrum for each of the next five fiscal years is as follows: licences granted by Industry Canada. Industry Canada’s spectrum licence

Years ending December 31 (millions) policy terms indicate that the spectrum licences will likely be renewed. The Company’s spectrum licences are expected to be renewed either 2 011 $ 373 every five years or every ten years following a review by Industry Canada 2012 254 of the Company’s compliance with licence terms and suitability for con- 2013 89 2014 39 tinued operation of the licences at terms to be established by Industry 2015 25 Canada. In addition to current usage, the Company’s spectrum licensed can be used for planned and new technologies. As a result of the com- bination of the significant roles of these factors, the Company’s spectrum licences are currently considered to have indefinite lives.

TELUS 2010 annual report . 153 (d) Impairment testing of intangible assets with indefinite lives and goodwill As referred to in Note 1(b) and Note 1(f), the carrying value of intangible assets with indefinite lives, and goodwill, is periodically tested for impairment and this test represents a significant estimate for the Company. The carrying amounts of intangible assets with indefinite lives and goodwill allocated to each reporting unit are as set out in the following table.

Intangible assets with indefinite lives Goodwill Tot a l

As at December 31 (millions) 2010 2009 2010 2009 2010 2009

Wireless $ß3,856 $ß3,856 $ß2,606 $ß2,606 $ß6,462 $ß6,462 Wireline – – 966 966 966 966 $ß3,856 $ß3,856 $ß3,572 $ß3,572 $ß7,428 $ß7,428

There is a material degree of uncertainty with respect to the estimates (e) Business acquisitions; other of the reporting units’ fair values given the necessity of making key Transactel Barbados, Inc.: On December 22, 2008, the Company economic assumptions about the future. The fair value calculation uses acquired a direct 29.99% economic interest in Transactel Barbados, Inc., discounted cash flow projections which employ the following key assump- a business process outsourcing and call centre company with facilities tions: future cash flows and growth projections, including economic in three Central American countries, for $19 million cash. Additional con- risk assumptions and estimates of achieving key operating metrics and tingent consideration could become payable depending upon Transactel drivers; the future weighted average cost of capital; and earnings mul- Barbados, Inc. earnings for the year ending December 31, 2011. tiples. The Company considers a range of reasonably possible amounts Concurrent with acquiring the initial interest in Transactel Barbados, Inc., to use for key assumptions and decides upon amounts that represent the Company provided two written put options to the vendor. The first management’s best estimate. In the normal course, changes are made written put option became exercisable on December 31, 2009, expiring to key assumptions to reflect current (at time of test) economic conditions, June 30, 2011, and allows the vendor to put up to a further 21.01% eco- updating of historical information used to develop the key assumptions nomic interest to the Company (the Company’s effective economic and changes in the Company’s debt ratings. interest in Transactel Barbados, Inc. would become 51% assuming the The cash flow projection key assumptions are based upon the written put option was exercised in full). The second written put option Company’s approved financial forecasts which span a period of three became exercisable on December 31, 2010, with no expiry, and allows years and are discounted at a consolidated rate of 8.25% (2009 – 7.61%). the vendor to put whatever interest is not put under the first written put For impairment testing valuation purposes, the cash flows subsequent option plus up to an incremental 44% economic interest to the Company. to the three-year projection period are extrapolated using perpetual The written put options set out the share pricing methodology, which growth rates of 1.75% (2009 – 1.75%) for the wireless reporting unit and is dependent upon Transactel Barbados, Inc. future earnings. zero (2009 – zero) for the wireline reporting unit; these growth rates do The vendor provided the Company with two purchased call options not exceed the observed long-term average growth rates for the markets which substantially mirror the written put options except that they in which the Company operates. are only exercisable upon achieving certain business growth targets. The Company validates its fair value results through the use of The Company initially accounted for its investment in Transactel the market-comparable approach and analytical review of industry and Barbados, Inc. using the equity method. Company-specific facts. The market-comparable approach uses cur- The investment was made with a view to enhancing the Company’s rent (at the time of test) market consensus estimates and equity trading business process outsourcing capacity, particularly regarding Spanish- prices for U.S. and Canadian firms in the same industry. In addition, the language capabilities. Company ensures that the combination of the valuations of the reporting On January 7, 2011, the Company exercised its purchased call option units is reasonable based on current market values of the Company. to acquire a further 21.01% economic interest in Transactel Barbados, Inc. The Company believes that any reasonably possible change in the from the vendor for $20 million cash. The Company continues to account key assumptions on which its reporting units’ fair values are based would for its resulting direct 51% economic interest in Transactel Barbados, Inc. not cause the reporting units’ carrying amounts to exceed their fair using the equity method. The control of Transactel Barbados, Inc. resides value amounts. If the future was to adversely differ from management’s with the “super-majority” of its board of directors, who have the con- best estimate of key assumptions and associated cash flows were to tinuing power to determine the strategic operating, investing and financing be materially adversely affected, the Company could potentially experi- policies of Transactel Barbados, Inc. Although the Company has the right ence future material impairment charges in respect of its intangible to elect the simple majority of the board of directors at the direct 51% assets with indefinite lives and goodwill. economic interest level, it does not have the right to elect the super- Sensitivity testing was conducted as a part of the December 2010 majority of the board of directors at that level. As a result, the vendor’s annual test. A component of the sensitivity testing was a break-even remaining direct 49% economic interest effectively has a veto right over analysis. Stress testing included moderate declines in annual cash flows the strategic operating, investing and financing policies of Transactel with all other assumptions being held constant; this too resulted in the Barbados, Inc. and thus the Company does not have the control neces- Company continuing to be able to recover the carrying value of its intan- sary to apply consolidation accounting. gible assets with indefinite lives and goodwill for the foreseeable future.

154 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 17

Black’s Photo Corporation: On September 3, 2009 (the acquisition Pro forma disclosures: The following pro forma supplemental date), the Company acquired a 100% economic and voting interest in information represents certain results of operations as if the business Black’s Photo Corporation, a national imaging and digital retail company acquisition noted above had been completed as at the beginning for $28 million cash ($26 million net of cash acquired). There was no of the fiscal year presented. contingent consideration in the transaction. This investment was made Year ended December 31, 2009 with a view to enhancing the Company’s distribution of wireless products (millions except per share amounts) As reported(1) Pro forma(2) and services across Canada. Operating revenues $ß9,606 $ß9,668 The primary factors that contributed to a purchase price that resulted Net income $ß1,002 $ 993 in the recognition of goodwill are: the existing Black’s Photo Corporation Net income per Common Share business; the acquired workforce; and the time-to-market benefits and Non-Voting Share of acquiring an established multi-location retailer to distribute wireless Basic $ß 3.14 $ß 3.12 products. Black’s Photo Corporation’s results of operations are included Diluted $ß 3.14 $ß 3.11 in the Company’s Wireless segment effective September 3, 2009. (1) Operating revenues and net income (loss) for the year ended December 31, 2009, The amount assigned to goodwill is not expected to be deductible include $44 and $(1), respectively, in respect of the acquisition of Black’s Photo Corporation. for tax purposes. (2) Pro forma amounts for the year ended December 31, 2009 reflect Black’s Photo Purchase price: The purchase price amounts assigned to assets Corporation. Black’s Photo Corporation was acquired on September 3, 2009; acquired and liabilities assumed are as set out in the following table: its results have been included in the Company’s Consolidated Statement of Income and Other Comprehensive Income effective the same date. Black’s Photo As at September 3, 2009 (millions) Corporation The pro forma supplemental information is based on estimates and assumptions which are believed to be reasonable. The pro forma Assets Current assets $ß22 supplemental information is not necessarily indicative of the Company’s Non-current assets consolidated financial results in future periods or the results that Property, plant and equipment 9 actually would have been realized had the business acquisitions been Intangible assets with indefinite life (brand) 7 completed at the beginning of the periods presented. The pro forma Other long-term assets 1 supplemental information includes incremental intangible asset amor- Total non-current assets 17 tization, financing and other charges as a result of the acquisitions, net of the related tax effects. Total identifiable assets acquired 39

Liabilities Current liabilities (19)

Net identifiable assets acquired 20 Goodwill 8

Net assets acquired $ß28 Acquisition effected by way of: Cash consideration $ß28

SHORT-TERM OBLIGATIONS 17 Summary review of bilateral bank facilities

The Company’s bilateral bank facilities are as follows:

As at December 31 (millions) 2010 2009

Net available $ß56 $ß53 Drawn 2 6 Outstanding, undrawn letters of credit 3 3 Gross available $ß61 $ß62

TELUS 2010 annual report . 155 LONG-TERM DEBT 18 Summary schedule of long-term debt and related disclosures

(a) Details of long-term debt

As at December 31 ($ in millions) 2010 2009

Series Rate of interest Maturity

TELUS Corporation Notes U.S.(2) 8.00%(1) June 2011 $ 736 $ß1,411 CB 5.00%(1) June 2013 299 299 CC 4.50%(1) March 2012 300 299 CD 4.95%(1) March 2017 691 690 CE 5.95%(1) April 2015 498 498 CF 4.95%(1) May 2014 698 697 CG 5.05%(1) December 2019 990 989 CH 5.05%(1) July 2020 992 – 5,204 4,883 TELUS Corporation Commercial Paper 1.13% Through February 2011 104 467 TELUS Communications Inc. Debentures 1 12.00%(1) May 2010 – 50 2 11.90%(1) November 2015 124 124 3 10.65%(1) June 2021 174 173 5 9.65%(1) April 2022 245 245 B 8.80%(1) September 2025 198 198 741 790 TELUS Communications Inc. First Mortgage Bonds U 11.50%(1) July 2010 – 30 Capital leases issued at varying rates of interest from 2.04% to 5.30% and maturing on various dates up to 2013 7 2 Long-Term Debt 6,056 6,172 Less: Current maturities 743 82 Long-Term Debt – non-current $ß5,313 $ß6,090

(1) Interest is payable semi-annually. (2) Principal face value of notes is U.S.$741 million (2009 – U.S.$1,348 million).

(b) TELUS Corporation notes On December 1, 2009, the Company exercised its right to early and The notes are senior, unsecured and unsubordinated obligations of the partially redeem, on December 31, 2009, U.S.$577 million of its publicly Company and rank equally in right of payment with all existing and future held 2011 (U.S. Dollar) Notes. As set out in Note 8, the loss on redemption, unsecured, unsubordinated obligations of the Company, are senior in which included the loss arising on early settlement of the associated right of payment to all existing and future subordinated indebtedness of cross currency interest rate swap agreements, was $99 million. the Company, and are effectively subordinated to all existing and future 2011 Cross Currency Interest Rate Swap Agreements: With respect obligations of, or guaranteed by, the Company’s subsidiaries. to the 2011 (U.S. Dollar) Notes, U.S.$0.7 billion (2009 – U.S.$1.3 billion) The indentures governing the notes contain certain covenants which, in aggregate, the Company entered into cross currency interest rate swap among other things, place limitations on the ability of TELUS and certain agreements which effectively convert the principal repayments and of its subsidiaries to: grant security in respect of indebtedness, enter interest obligations to Canadian dollar obligations with an effective fixed into sale and lease-back transactions and incur new indebtedness. interest rate of 8.493% and an effective fixed economic exchange rate On July 27, 2010, the Company exercised its right to early and partially of $1.5327. redeem, on September 2, 2010, U.S.$607 million of its publicly held The counterparties of the swap agreements are highly rated financial 2011 (U.S. Dollar) Notes. As set out in Note 8, the loss on the redemption, institutions and the Company does not anticipate any non-performance. which included the loss arising on early settlement of the associated TELUS has not required collateral or other security from the counter- cross currency interest rate swap agreements, was $52 million. parties due to its assessment of their creditworthiness.

156 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 18

The Company translates items such as the U.S. Dollar notes (2009 – $721 million), as set out in Note 5(h). The asset value of the into equivalent Canadian dollars at the rate of exchange in effect at swap agreements increases (decreases) when the statement of financial the statement of financial position date. The swap agreements at position date exchange rate increases (decreases) the Canadian dollar December 31, 2010, comprised a net derivative liability of $404 million equivalent of the U.S. Dollar notes.

Principal face amount Redemption Outstanding present at financial value spread Series Issued Issue price Originally issued statement date (basis points)(1)

8.00% (U.S. Dollar) Notes due 2011 May 2001 U.S.$994.78 U.S.$2.0 billion U.S.$0.7 billion 30 5.00% Notes, Series CB May 2006 $998.80 $300 million $300 million 16 4.50% Notes, Series CC March 2007 $999.91 $300 million $300 million 15 4.95% Notes, Series CD March 2007 $999.53 $700 million $700 million 24 5.95% Notes, Series CE(2) April 2008 $998.97 $500 million $500 million 66 4.95% Notes, Series CF(2) May 2009 $999.96 $700 million $700 million 71 5.05% Notes, Series CG(2) December 2009 $994.19 $1.0 billion $1.0 billion 45.5 5.05% Notes, Series CH(2) July 2010 $997.44 $1.0 billion $1.0 billion 47

(1) The notes are redeemable at the option of the Company, in whole at any time, or in part from time to time, on not fewer than 30 and not more than 60 days’ prior notice. The redemption price is equal to the greater of (i) the present value of the notes discounted at the Adjusted Treasury Rate (in respect of the U.S. dollar denominated notes) or the Government of Canada yield (in respect of the Canadian dollar denominated notes) plus the redemption present value spread, or (ii) 100% of the principal amount thereof. In addition, accrued and unpaid interest, if any, will be paid to the date fixed for redemption. (2) The Series CE Notes, Series CF Notes, Series CG Notes and Series CH Notes each require the Company to make an offer to repurchase the Series CE Notes, Series CF Notes, Series CG Notes and Series CH Notes at a price equal to 101% of their principal plus accrued and unpaid interest to the date of repurchase upon the occurrence of a change in control triggering event, as defined in the supplemental trust indenture.

(c) TELUS Corporation commercial paper TELUS Corporation’s credit facility expiring on May 1, 2012, is On May 15, 2007, TELUS Corporation entered into an unsecured unsecured and bears interest at prime rate, U.S. Dollar Base Rate, a commercial paper program, which is backstopped by a portion of its bankers’ acceptance rate or London interbank offered rate (LIBOR) $2.0 billion syndicated credit facility, enabling it to issue commercial (all such terms as used or defined in the credit facility), plus applicable paper up to a maximum aggregate of $800 million (or U.S. dollar margins. The credit facility contains customary representations, war- equivalent), to be used for general corporate purposes, including capi- ranties and covenants including two financial quarter-end financial ratio tal expenditures and investments; in August 2008, the program was tests. The financial ratio tests are that the Company may not permit its expanded to $1.2 billion. Commercial paper debt is due within one year net debt to operating cash flow ratio to exceed 4.0:1 and may not permit but is classified as long-term debt as the amounts are fully supported, its operating cash flow to interest expense ratio to be less than 2.0:1, and the Company expects that they will continue to be supported, each as defined under the credit facility. by the revolving credit facility which has no repayment requirements On June 19, 2009, TELUS Corporation entered into an amended within the next year. $300 million revolving credit facility with a syndicate of financial institutions, expiring December 31, 2010; during the quarter ended September 30, (d) TELUS Corporation credit facilities 2010, the Company exercised its right to cancel the facility in its entirety. On March 2, 2007, TELUS Corporation entered into a $2.0 billion bank The credit facility was unsecured and bore interest at prime rate or credit facility with a syndicate of financial institutions. The credit facility bankers’ acceptance rate (all such terms as used or defined in the credit consists of a $2.0 billion (or U.S. dollar equivalent) revolving credit facility facility), plus applicable margins. expiring on May 1, 2012, to be used for general corporate purposes Continued access to TELUS Corporation’s credit facility is not contin- including the backstop of commercial paper. gent on the maintenance by TELUS Corporation of a specific credit rating.

As at December 31 (millions) 2010 2009

Revolving credit facility expiring May 1, 2012 May 1, 2012 December 31, 2010 Tot a l

Net available $ß1,779 $ß1,410 $ß300 $ 1,710 Outstanding, undrawn letters of credit 117 123 – 123 Backstop of commercial paper 104 467 – 467 Gross available $ß2,000 $ß2,000 $ß300 $ 2,300

(e) TELUS Communications Inc. debentures than 30 days’ notice at the higher of par and the price calculated to The outstanding Series 1 through 5 debentures were issued by a pre- provide the Government of Canada Yield plus 15 basis points. decessor corporation of TELUS Communications Inc., BC TEL, under a Pursuant to an amalgamation on January 1, 2001, the Debentures Trust Indenture dated May 31, 1990, and are non-redeemable. became obligations of TELUS Communications Inc. The debentures The outstanding Series B Debentures were issued by a predecessor are not secured by any mortgage, pledge or other charge and are gov- corporation of TELUS Communications Inc., AGT Limited, under a Trust erned by certain covenants including a negative pledge and a limitation Indenture dated August 24, 1994, and a supplemental trust indenture on issues of additional debt, subject to a debt to capitalization ratio dated September 22, 1995. They are redeemable at the option of the and interest coverage test. Effective June 12, 2009, TELUS Corporation Company, in whole at any time or in part from time to time, on not less guaranteed the payment of the debentures’ principal and interest.

TELUS 2010 annual report . 157 (f) TELUS Communications Inc. first mortgage bonds similar rights limited to certain assets located in the province of Quebec. The first mortgage bonds were issued by TELUS Communications The first mortgage bonds are non-redeemable. Pursuant to a corporate (Québec) Inc. and are secured by an immovable hypothec and by a reorganization effected July 1, 2004, the outstanding first mortgage movable hypothec charging specifically certain immovable and movable bonds became obligations of TELUS Communications Inc. Effective property of the subsidiary TELUS Communications Inc., such as land, June 12, 2009, TELUS Corporation guaranteed the payment of the first buildings, equipment, apparatus, telephone lines, rights-of-way and mortgage bonds’ principal and interest.

(g) Long-term debt maturities Anticipated requirements to meet long-term debt repayments, including related hedge amounts and calculated upon such long-term debts owing as at December 31, 2010, for each of the next five fiscal years are as follows:

Long-term debt denominated in Canadian dollars U.S. dollars

Derivative liability All except Years ending December 31 (millions) capital leases Capital leases Debt(1) (Receive)(1) Pay Tot a l Tot a l

2 011 $ – $ß7 $ß737 $ß(737) $ß1,135 $ß1,135 $ß1,142 2012 404 – – – – – 404 2013 300 – – – – – 300 2014 700 – – – – – 700 2015 625 – – – – – 625 Thereafter 3,324 – – – – – 3,324 Future cash outflows in respect of long-term debt principal repayments 5,353 7 737 (737) 1,135 1,135 6,495 Future cash outflows in respect of associated interest and like carrying costs(2) 2,311 1 29 (29) 48 48 2,360 Undiscounted contractual maturities (Note 5(c)) $ß7,664 $ß8 $ß766 $ß(766) $ß1,183 $ß1,183 $ß8,855

(1) Where applicable, principal-related cash flows reflect foreign exchange rates at December 31, 2010. (2) Future cash outflows in respect of associated interest and like carrying costs for commercial paper and amounts drawn under the Company’s credit facilities (if any) have been calculated based upon the rates in effect as at December 31, 2010.

COMMON SHARE AND NON-VOTING SHARE EQUITY Review of Common Share and Non-Voting Share equity items including details 19 of other comprehensive income, accumulated other comprehensive income and share option price stratification

(a) Authorized share capital Company, whether voluntary or involuntary, or any other distribution of As at December 31, 2010 and 2009, the Company’s authorized share the assets of the Company among its shareholders for the purpose of capital consisted of 1 billion no par value shares of each of the following winding-up its affairs, preferences are as follows: First Preferred Shares; classes: First Preferred Shares; Second Preferred Shares; Common Shares; Second Preferred Shares; and finally Common Shares and Non-Voting and Non-Voting Shares. Only holders of Common Shares may vote at Shares participating equally, without preference or distinction. Non-Voting general meetings of the Company with each holder of Common Shares Shares have conversion rights that, in certain instances (such as if a being entitled to one vote per Common Share held at all such meetings. change in foreign ownership restrictions were to occur), allow the holders With respect to priority in payment of dividends and in the distribu- of Non-Voting Shares to convert them to Common Shares on a one-for- tion of assets in the event of liquidation, dissolution or winding-up of the one basis.

158 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 19

(b) Accumulated other comprehensive income (loss)

Years ended December 31 2010 2009

Accumulated Accumulated Other comprehensive other comprehensive Other comprehensive other comprehensive income (loss) income (loss) income (loss) income (loss)

Amount Income Beginning End of Amount Income Beginning End of (millions) arising taxes Net of period period arising taxes Net of period period

Change in unrealized fair value of derivatives designated as cash flow hedges (Note 5(i)) Gains (losses) arising in current period $ß15 $ß11 $ß 4 $ß(264) $ß(26) $ß(238) (Gains) losses arising in prior periods and transferred to net income in the current period 59 9 50 362 55 307 74 20 54 $ß(53) $ 1 98 29 69 $ß(122) $ß(53) Cumulative foreign currency translation adjustment – – – (19) (19) (12) – (12) (7) (19) Change in unrealized fair value of available-for- sale financial assets and recognition of amounts realized – – – – – 1 – 1 (1) – $ß74 $ß20 $ß54 $ß(72) $ß(18) $ 87 $ 29 $ 58 $ß(130) $ß(72)

As at December 31, 2010, the Company’s estimate of the net Shares at a price equal to the fair market value at the time of grant; prior amount of existing gains (losses) arising from the unrealized fair value to 2001, options were also similarly awarded in respect of Common of derivatives designated as cash flow hedges which are reported Shares. Prior to 2002, directors were also awarded options to purchase in accumulated other comprehensive income and are expected to be Non-Voting Shares and Common Shares at a price equal to the fair reclassified to net income in the next twelve months, excluding tax market value at the time of grant. Option awards currently granted under effects, is $3 million. the plans may be exercised over specific periods not to exceed seven years from the time of grant; prior to 2003, share option awards were (c) Share option plans granted with exercise periods not to exceed ten years. The Company has a number of share option plans under which officers The following table presents a summary of the activity related to the and other employees may receive options to purchase Non-Voting Company’s share option plans.

Years ended December 31 2010 2009

Weighted Weighted Number of average share Number of average share share options option price share options option price

Outstanding, beginning of period 11,057,916 $ß38.08 10,153,316 $ß39.23 Granted 2,787,876 33.00 2,572,556 30.61 Exercised(1) (1,329,351) 29.23 (619,760) 20.71 Forfeited (614,941) 39.55 (958,122) 42.18 Expired (159,834) 35.80 (90,074) 30.21 Outstanding, end of period 11,741,666 $ß37.83 11,057,916 $ß38.08

(1) The total intrinsic value of share option awards exercised for the year ended December 31, 2010, was $17 million (2009 – $7 million) (reflecting a weighted average price at the dates of exercise of $41.88 per share (2009 – $32.41 per share)). The tax benefit realized for the tax deductions from share option exercises for the year ended December 31, 2010, was $NIL (2009 – $NIL).

In 2006, certain outstanding grants of share option awards, which of the share option award is settled as a share option or using the net- were made after 2001, had a net-equity settlement feature applied equity settlement feature. In 2007, certain outstanding grants of share to them. This event did not result in the optionees receiving incremental option awards had a net-cash settlement feature applied to them, as value and therefore modification accounting was not required for it. further discussed in Note 12(b); the optionee has the choice of exercising The optionee does not have the choice of exercising the net-equity the net-cash settlement feature. settlement feature. It is at the Company’s discretion whether an exercise

TELUS 2010 annual report . 159 The following table reconciles the number of share options exercised and the associated number of Common Shares and Non-Voting Shares issued.

Years ended December 31 2010 2009

Common Non-Voting Common Non-Voting Shares Shares Total Shares Shares Tot a l

Shares issued or issuable pursuant to exercise of share options 96,526 440,073 536,599 1,506 23,984 25,490 Impact of optionee choosing to settle share option award exercises using net-cash settlement feature 25,225 451,652 476,877 88,221 474,941 563,162 Shares issued pursuant to use of share option award net-equity settlement feature n.a.(1) 77,061 77,061 n.a.(1) 15,162 15,162 Impact of Company choosing to settle share option award exercises using net-equity settlement feature n.a.(1) 238,814 238,814 n.a.(1) 15,946 15,946 Share options exercised 121,751 1,207,600 1,329,351 89,727 530,033 619,760

(1) Share option awards for Common Shares do not have a net-equity settlement feature.

The following is a life and exercise price stratification of the Company’s share options outstanding as at December 31, 2010.

Options outstanding(1) Options exercisable

Range of option prices Tot a l

Low $ß 8.43 $ß14.93 $ß23.08 $ß34.81 $ß53.09 $ß 8.43 Weighted High $ß10.75 $ß22.06 $ß33.14 $ß50.47 $ß64.64 $ß64.64 Number average Year of expiry and number of shares of shares price

2 011 – 3,650 559,312 450,650 – 1,013,612 1,013,612 $ß29.08 2012 4,733 84,600 65,000 1,057,785 – 1,212,118 1,212,118 $ß37.00 2013 – – – 1,112,797 51,741 1,164,538 1,039,855 $ß43.52 2014 – – – 30,120 973,921 1,004,041 994,301 $ß56.45 2015 – – 19,475 2,321,328 – 2,340,803 – $ – 2016 – – 2,305,527 – – 2,305,527 – $ – 2017 – – 2,551,226 149,801 – 2,701,027 – $ – 4,733 88,250 5,500,540 5,122,481 1,025,662 11,741,666 4,259,886 Weighted average remaining contractual life (years) 1.8 1.9 5.1 2.9 3.2 4.0 Weighted average price $ß10.10 $ß16.34 $ß30.85 $ß41.95 $ß56.70 $ß37.83 Aggregate intrinsic value (2) (millions) $ – $ 2 $ 68 $ 9 $ – $ 79

Options exercisable

Number of shares 4,733 88,250 624,312 2,544,159 998,432 4,259,886 Weighted average remaining contractual life (years) 1.8 1.9 0.7 1.6 3.2 1.8 Weighted average price $ß10.10 $ß16.34 $ß24.41 $ß40.25 $ß56.66 $ß41.25 Aggregate intrinsic value (2) (millions) $ – $ 2 $ 12 $ 8 $ – $ 22

(1) As at December 31, 2010, 10,764,911 share options, with a weighted average remaining contractual life of 3.8 years, a weighted average price of $38.03 and an aggregate intrinsic value of $72 million, are vested or were expected to vest; these amounts differ from the corresponding amounts for all share options outstanding due to an estimate for expected forfeitures. (2) The aggregate intrinsic value is calculated upon December 31, 2010, per share prices of $45.48 for Common Shares and $43.25 for Non-Voting Shares.

As at December 31, 2010, approximately 29 million Non-Voting Shares were reserved for issuance, from Treasury, under the share option plans.

160 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 20

COMMITMENTS AND CONTINGENT LIABILITIES Summary review of contingent liabilities, lease obligations, guarantees, 20 claims and lawsuits

(a) Leases The Company occupies leased premises in various centres and has land, buildings and equipment under operating leases. At December 31, 2010, the future minimum lease payments under capital leases and operating leases are as follows:

Operating lease payments Operating Land and buildings Vehicles lease receipts Capital lease Occupancy and other from sub-let land Years ending December 31 (millions) payments Rent costs Gross equipment Tot a l and buildings

2 011 $ß8 $ß169 $ß96 $ß265 $ß20 $ß285 $ß 7 2012 – 153 88 241 12 253 12 2013 – 142 87 229 6 235 12 2014 – 129 83 212 2 214 12 2015 – 118 81 199 1 200 12 Total future minimum lease payments 8 Less imputed interest 1 Capital lease liability $ß7

Total future minimum operating lease payments at December 31, 2010, transaction, historically the Company has not made significant payments were $2,333 million. Of this amount, $2,291 million was in respect of land under these indemnities. and buildings; approximately 57% of this amount was in respect of the In connection with its 2001 disposition of TELUS’ directory business, Company’s five largest leases, all of which were for office premises over the Company agreed to bear a proportionate share of the new owner’s various terms, with expiry dates which range from 2016 to 2026. increased directory publication costs if the increased costs were to arise from a change in the applicable CRTC regulatory requirements. The (b) Concentration of labour Company’s proportionate share is 40% through May 2011 and then 15% In 2010, TELUS commenced collective bargaining with the Telecommu- in the final five years, ending May 2016. As well, should the CRTC take nications Workers Union to renew the collective agreement which expired any action which would result in the owner being prevented from carrying November 19, 2010. As at December 31, 2010, approximately 31% on the directory business as specified in the agreement, TELUS would (2009 – 32%) of the Company’s workforce is covered by the expired indemnify the owner in respect of any losses that the owner incurred. contract with the Telecommunications Workers Union. As at December 31, 2010, the Company has no liability recorded in respect of indemnification obligations. (c) Guarantees Guarantees: Canadian generally accepted accounting principles (d) Claims and lawsuits require the disclosure of certain types of guarantees and their maximum, General: A number of claims and lawsuits (including class actions) undiscounted amounts. The maximum potential payments represent seeking damages and other relief are pending against the Company. a worst-case scenario and do not necessarily reflect results expected As well, the Company has received or is aware of certain potential by the Company. Guarantees requiring disclosure are those obligations claims (including intellectual property infringement claims) against the that require payments contingent on specified types of future events. Company and, in some cases, numerous other wireless carriers and In the normal course of its operations, the Company enters into obligations telecommunications service providers. In some instances, the matters that GAAP may consider to be guarantees. As defined by Canadian are at a preliminary stage and the potential for liability and magnitude GAAP, guarantees subject to these disclosure guidelines do not include of potential loss currently cannot be readily determined. It is impossible guarantees that relate to the future performance of the Company. As at at this time for the Company to predict with any certainty the outcome December 31, 2010, the Company’s maximum undiscounted guarantee of any such claims, potential claims and lawsuits. However, subject amounts, without regard for the likelihood of having to make such to the foregoing limitations, management is of the opinion, based upon payment, were not material. legal assessment and information presently available, that it is unlikely Indemnification obligations: In the normal course of operations, that any liability, to the extent not provided for through insurance or the Company may provide indemnification in conjunction with certain otherwise, would be material in relation to the Company’s consolidated transactions. These indemnification obligations range in duration financial position, excepting the items enumerated following. and vary in terms. Where appropriate, an indemnification obligation is Certified class actions: A class action was brought in August 2004, recorded as a liability. In many cases, there is no maximum limit on under the Class Actions Act (Saskatchewan), against a number of these indemnification obligations and the overall maximum amount past and present wireless service providers including the Company. of such indemnification obligations cannot be reasonably estimated. That claim (the Frey matter) alleges that each of the carriers is in breach Other than obligations recorded as liabilities at the time of the of contract and has violated competition, trade practices and consumer

TELUS 2010 annual report . 161 protection legislation across Canada in connection with the collection of Similar proceedings have also been filed by, or on behalf of, plaintiffs’ system access fees, and seeks to recover direct and punitive damages counsel in other provincial jurisdictions. in an unspecified amount. In September 2007, the class was certified by Should the ultimate resolution of these actions differ from manage - the Saskatchewan Court of Queen’s Bench as an opt-in national class. ment’s assessments and assumptions, a material adjustment to the In February 2008, the same court removed from the class all customers Company’s financial position and the results of its operations could result; of the Company who are bound by an arbitration clause, applying two management’s assessments and assumptions include that a reliable decisions of the Supreme Court of Canada. In March 2010, the Company estimate of the exposure cannot be made at this preliminary stage of obtained leave to appeal the certification decision. That appeal was heard the lawsuit. in December 2010 and judgement was reserved. A parallel proceeding Uncertified class actions: Uncertified class actions against the (the Collins matter) was commenced in Saskatchewan in July 2009 after Company include a 2008 class action brought in Saskatchewan alleging the enactment of opt-out national class action legislation in Saskatchewan. that, among other things, Canadian telecommunications carriers including In Collins, plaintiff’s counsel applied to certify a new national class in the Company have failed to provide proper notice of 9-1-1 charges to the Saskatchewan making substantially the same allegations as in the Frey public and have been deceitfully passing them off as government charges, matter. That application was stayed by the court in December 2009 as well as a 2008 class action brought in Ontario alleging that the Com- upon an application by the defendants to dismiss it for abuse of process, pany has misrepresented its practice of “rounding up” wireless airtime to conditional on possible future changes in circumstance. In March 2010, the nearest minute and charging for the full minute. The plaintiffs in these the plaintiffs applied for leave to appeal the stay decision. That applica- actions seek direct and punitive damages and other relief. The Company tion is adjourned pending the outcome of the appeal in the Frey matter. is assessing the merits of these claims but the potential for liability and The Company believes that it has good defences to both actions. magnitude of potential loss cannot be readily determined at this time.

ADDITIONAL FINANCIAL INFORMATION 21 Summary schedules of items comprising certain primary financial statement line items

(a) Statement of income and Years ended December 31 (millions) 2010 2009 other comprehensive income Employee benefits expense Years ended December 31 (millions) 2010 2009 Wages and salaries(3) $ß2,010 $ß2,093 Pensions – defined benefit (Note 13(b)) 28 18 Operating revenues Pensions – defined contribution (Note 13(l)) 61 61 Service(1) $ß9,168 $ß9,077 Other defined benefits (Note 13(b)) 3 2 Equipment 611 529 Restructuring costs (Note 7) 64 186 $ß9,779 $ß9,606 Other 131 128 Operations expense(2) 2,297 2,488 Cost of sales and service Capitalized internal labour costs (363) (368) Cost of goods sold $ß1,189 $ß1,053 $ß1,934 $ß2,120 Other 2,191 2,225 (1) Operating revenues arising from services includes portable subsidy receipts for the 3,380 3,278 year ended December 31, 2010, of $37 (2009 – $51), as disclosed in Note 4(c). Selling, general and administrative 2,682 2,647 (2) Cost of sales and service excludes depreciation and amortization of intangible assets and includes cost of goods sold and costs to operate and maintain access to and $ß5,925 $ß6,062 usage of the Company’s telecommunications infrastructure. Selling, general and Advertising expense $ 313 $ 282 administrative costs include sales and marketing costs (including commissions), customer care, bad debt expense, real estate costs and corporate overhead costs such as information technology, finance (including billing services, credit and collection), legal, human resources and external affairs. Employee salaries, benefits and related costs are included in one of the two components of operations expense to the extent that the costs are related to the component functions. (3) Wages and salaries include share-based compensation for the year ended December 31, 2010, of $57 (2009 – $69), as disclosed in Note 12.

162 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 21

(b) Statement of financial position (c) Supplementary cash flow information

As at December 31 (millions) 2010 2009 Years ended December 31 (millions) 2010 2009

Accounts receivable Net change in non-cash working capital Customer accounts receivable $ 741 $ 556 Accounts receivable $ (223) $ß 272 Accrued receivables – customer 102 103 Inventories (13) 143 Allowance for doubtful accounts (41) (59) Prepaid expenses (8) 9 Accounts payable and accrued liabilities 112 (98) 802 600 Income and other taxes receivable Accrued receivables – other 113 93 and payable, net (216) 28 Other 2 1 Advance billings and customer deposits 112 (15) $ 917 $ 694 $ (236) $ß 339 Inventories Long-term debt issued Wireless handsets, parts and accessories $ 236 $ 226 TELUS Corporation Commercial Paper $ 2,725 $ 5,387 Other 47 44 TELUS Corporation Credit Facility $ 283 $ 270 expiring May 1, 2012 – 2,025 Other long-term assets Other 1,000 1,700 Recognized transitional pension assets $ 3,725 $ 9,112 and pension plan contributions Redemptions and repayment in excess of charges to income $ß1,683 $ß1,565 of long-term debt Other 61 37 TELUS Corporation Commercial Paper $ß(3,088) $ß(5,351) $ß1,744 $ß1,602 TELUS Corporation Credit Facility Accounts payable and accrued liabilities expiring May 1, 2012 – (3,003) Accrued liabilities $ 555 $ 560 Other (1,039) (890) Payroll and other employee-related liabilities 307 272 $ß(4,127) $ß(9,244) Accrual for net-cash settlement feature Interest (paid) for share option awards (Note 12(b)) 18 14 Amounts (paid) in respect of interest expense $ (419) $ (468) Asset retirement obligations 3 3 Amounts (paid) in respect of loss on redemption 883 849 of long-term debt (Note 18(b)) (52) (99) Trade accounts payable 448 382 $ (471) $ (567) Interest payable 73 60 Other 91 94 $ß1,495 $ß1,385 Advance billings and customer deposits Advance billings $ 536 $ 470 Regulatory deferral accounts 62 144 Deferred customer activation and connection fees 35 40 Customer deposits 25 20 $ 658 $ 674 Other long-term liabilities Derivative liabilities (Note 5(h)) $ – $ 721 Pension and other post-retirement liabilities 223 214 Other 174 173 397 1,108 Regulatory deferral accounts 100 – Deferred customer activation and connection fees 67 80 Deferred gain on sale-leaseback of buildings 25 38 Asset retirement obligations 49 45 $ 638 $ß1,271

TELUS 2010 annual report . 163 TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL 22 Summary schedules and review of transactions with key management personnel

The Company’s key management personnel have authority and The liability amounts accrued for share-based compensation awards responsibility for overseeing, planning, directing and controlling the to key management personnel are as follows: activities of the Company and consist of the Company’s Board of As at December 31 (millions) 2010 2009 Directors and the Company’s Executive Leadership Team. Restricted stock units $ß 7 $ß 5 Total compensation expense for key management personnel, and Net-cash settlement feature for share options 3 2 the composition thereof, for fiscal 2010 and fiscal 2009, is as follows: Deferred share units(1) 18 12

For the years ended December 31 (millions) 2010 2009 $ß28 $ß19

Short-term benefits $ß11 $ß10 (1) The Company’s Directors Share Option and Compensation Plan provides that, in Post-employment pension and other benefits 3 3 addition to their annual equity grant of deferred share units, a director may elect to receive his or her annual retainer and meeting fees in deferred share units, Non-Voting (1) Share-based compensation 15 13 Shares or cash. Deferred share units entitle the directors to a specified number of, or a cash payment based on the value of, TELUS’ Common Shares and Non-Voting $ß29 $ß26 Shares. Deferred share units are paid out and expire when a director ceases to be (1) For the year ended December 31, 2010, share-based compensation is net of $5 a director for any reason. (2009 – inclusive of $3) of effects of derivatives used to manage share-based compensation costs (Note 12(b)-(c)). During the year ended December 31, 2010, key management per- sonnel exercised 234,359 share options (2009 – 127,000 share options) As disclosed in Note 12, the Company has made awards of share- which had an intrinsic value of $3 million (2009 – $1 million) at the time based compensation in fiscal 2010 and 2009. As most of these awards of exercise, reflecting a weighted average price at the date of exercise are cliff-vesting the expense will be recognized ratably over a period of of $42.85 (2009 – $32.57). years and thus only a portion of the fiscal 2010 and fiscal 2009 awards The Company’s key management personnel receive communications are included in the amounts in the table above. services from the Company, which are immaterial and domestic in nature. For the years ended December 31 (millions) 2010 2009 Employment agreements with members of the Executive Leadership Share options awarded – Team typically provide for severance payments if the executive’s employ- total fair value at date of grant $ß 3 $ß3 ment is terminated without cause: 18 months (24 months for the Chief Restricted stock units awarded – Executive Officer and the Chief Financial Officer) of base salary, benefits total fair value at date of grant 7 5 and accrual of pension service in lieu of notice and fifty per cent of base $ß10 $ß8 salary in lieu of annual cash bonus (other than for the Chief Executive Officer, who would receive twice the average of the preceding three years’ annual cash bonus). In the event of a change in control (as defined), the Executive Leadership Team members are not entitled to any differ- ent treatment than other Company employees with respect to unvested share-based compensation, other than for the Chief Executive Officer, whose unvested share-based compensation would immediately vest.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 23 Summary schedules and review of differences between Canadian and United States generally accepted accounting principles as they apply to the Company

The Consolidated financial statements have been prepared in in accordance with IFRS-IASB to U.S. GAAP. Upon the commencement accordance with Canadian GAAP. As discussed further in Note 2, of presenting the Company’s financial statements in accordance with Canadian GAAP is being converged with IFRS-IASB. The United IFRS-IASB in fiscal 2011, the Company currently expects that it will cease States Securities and Exchange Commission, effective March 4, 2008, reconciling its financial statements to U.S. GAAP. no longer requires certain reporting issuers, such as the Company, The principles currently adopted in these financial statements to reconcile their financial statements included in their filings with the conform in all material respects to those generally accepted in the United United States Securities and Exchange Commission and prepared States except as summarized below.

164 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 22–23

Significant differences between Canadian GAAP and U.S. GAAP The following is an analysis of retained earnings reflecting the would have the following effect on reported net income of the Company: application of U.S. GAAP:

Years ended December 31 Years ended December 31 (millions) 2010 2009 (millions except per share amounts) 2010 2009 Balance at beginning of period $ 553 $ 227 Net income in accordance Net income in accordance with U.S. GAAP with Canadian GAAP $ß1,038 $ß1,002 attributable to Common Shares Adjustments: and Non-Voting Shares 958 927 Operating expenses 1,511 1,154 Operations (b) (57) (65) Dividends (642) (601) Amortization of intangible assets (c) (50) (50) Taxes on the above adjustments Balance at end of period $ 869 $ 553 and tax rate changes (e) 31 44 The following is an analysis of major statement of financial position Net income in accordance with U.S. GAAP 962 931 Other comprehensive income (loss), categories reflecting the application of U.S. GAAP: net of taxes (f) As at December 31 (millions) 2010 2009 In accordance with Canadian GAAP 54 58 Current Assets $ß 1,390 $ß 1,127 Change in pension related other Non-Current Assets comprehensive income accounts (144) (439) Property, plant and equipment 7,722 7,729 In accordance with U.S. GAAP (90) (381) Intangible assets 6,541 6,605 Comprehensive income in Goodwill 3,974 3,974 accordance with U.S. GAAP $ 872 $ 550 Other assets 310 362 Net income in accordance with U.S. GAAP 18,547 18,670 attributable to: $ß19,937 $ß19,797 Common Shares and Non-Voting Shares $ 958 $ 927 Current Liabilities $ß 3,950 $ß 2,964 Non-controlling interests 4 4 Non-Current Liabilities $ 962 $ 931 Long-term debt 5,340 6,120 Comprehensive income in accordance Other long-term liabilities 838 1,413 with U.S. GAAP attributable to: Deferred income taxes 1,424 1,323 Common Shares and Non-Voting Shares $ 868 $ 546 7,602 8,856 Non-controlling interests 4 4 Total Liabilities 11,552 11,820 $ 872 $ 550 Owners’ Equity Net income in accordance with U.S. GAAP Common Share and Non-Voting per Common Share and Non-Voting Share Share equity 8,363 7,956 Basic $ß 2.99 $ß 2.92 Non-controlling interests 22 21 Diluted $ß 2.98 $ß 2.91 8,385 7,977 $ß19,937 $ß19,797

The following is a reconciliation of Common Share and Non-Voting Share equity incorporating the significant differences between Canadian and U.S. GAAP: Common Share and Non-Voting Share equity

Accumulated other Common Non-Voting Contributed Retained comprehensive As at December 31, 2010 (millions) Shares Shares surplus earnings income (loss) Total

Under Canadian GAAP $ß2,219 $ß3,237 $ß190 $ß2,551 $ß (18) $ß8,179 Adjustments: Merger of BC TELECOM and TELUS (a), (c), (d) 1,733 883 – (1,582) (973) 61 Share-based compensation (b) 10 60 26 (96) – – Acquisition of Clearnet Communications Inc. Goodwill (d) – 131 – (8) – 123 Convertible debentures – (3) (1) 4 – – Under U.S. GAAP $ß3,962 $ß4,308 $ß215 $ 869 $ß(991) $ß8,363

TELUS 2010 annual report . 165 Common Share and Non-Voting Share equity

Accumulated other Common Non-Voting Contributed Retained comprehensive As at December 31, 2009 (millions) Shares Shares surplus earnings income (loss) Tot a l

Under Canadian GAAP $ß2,216 $ß3,070 $ß181 $ß2,159 $ß (72) $ß7,554 Adjustments: Merger of BC TELECOM and TELUS (a), (c), (d) 1,733 883 – (1,508) (829) 279 Share-based compensation (b) 10 53 31 (94) – – Acquisition of Clearnet Communications Inc. Goodwill (d) – 131 – (8) – 123 Convertible debentures – (3) (1) 4 – – Under U.S. GAAP $ß3,959 $ß4,134 $ß211 $ 553 $ß(901) $ß7,956

(a) Merger of BC TELECOM and TELUS Share-based compensation: Both Canadian GAAP and U.S. GAAP The business combination between BC TELECOM and TELUS require the use of the fair value method of accounting for share-based Corporation (renamed TELUS Holdings Inc., which was wound up compensation for awards made after 2001 and 1994, respectively. June 1, 2001) was accounted for using the pooling of interests On a prospective basis, commencing January 1, 2006, there is no method under Canadian GAAP. Under Canadian GAAP, the application longer a difference between Canadian GAAP and U.S. GAAP share- of the pooling of interests method of accounting for the merger of based compensation expense recognized in the results of operations BC TELECOM and TELUS Holdings Inc. resulted in a restatement of prior arising from current share-based compensation awards accounted periods as if the two companies had always been combined. Under U.S. for as equity instruments. As share option awards granted subsequent GAAP, the merger is accounted for using the purchase method. to 1994 and prior to 2002 are captured by U.S. GAAP, but are not Use of the purchase method resulted in TELUS (TELUS Holdings Inc.) captured by Canadian GAAP, differences in owners’ equity accounts being acquired by BC TELECOM for $4,662 million (including merger arising from these awards will continue. related costs of $52 million) effective January 31, 1999. Substantially all of the Company’s outstanding share option awards that were granted prior to January 1, 2005, have a net-cash settlement (b) Operating expenses – Operations feature; the optionee has the choice of exercising the net-cash settlement Future employee benefits: Under U.S. GAAP, TELUS’ future employee feature. The affected outstanding share option awards largely take on benefit assets and obligations have been recorded at their fair values the characteristics of liability instruments rather than equity instruments; on acquisition. Accounting for future employee benefits under Canadian the minimum expense recognized for the affected share option awards GAAP changed to become more consistent with U.S. GAAP effective will be their grant-date fair values. Under U.S. GAAP, the grant-date January 1, 2000. Canadian GAAP provides that the transitional balances fair values of affected outstanding share option awards granted subse- can be accounted for prospectively. Therefore, to conform to U.S. GAAP, quent to 1994 affected the transitional amount whereas Canadian the amortization of the transitional amount needs to be removed from GAAP only considered grant-date fair values for affected outstanding the future employee benefit expense. share option awards granted subsequent to 2001; for the year ended Unlike Canadian GAAP, U.S. GAAP requires the full recognition December 31, 2010, this resulted in the U.S. GAAP expense being greater of obligations associated with employee future benefit plans. Under than the Canadian GAAP expense by $2 million (2009 – $1 million). U.S. GAAP, the funded states of the Company’s plans are shown gross on the consolidated statements of financial position and the difference (c) Operating expenses – between the net funded plan states and the net accrued benefit assets Amortization of intangible assets or liabilities are included as a component of accumulated other com- As TELUS’ intangible assets on acquisition have been recorded at their prehensive income. fair value (see (a)), amortization of such assets, other than for those with indefinite lives, needs to be included under U.S. GAAP; consistent with prior years, amortization is calculated using the straight-line method.

The incremental amounts recorded as intangible assets arising from the TELUS acquisition above are as follows:

Net book value Accumulated As at December 31 (millions) Cost amortization 2010 2009

Intangible assets subject to amortization Subscribers – wireline $ß1,950 $ 543 $ß1,407 $ß1,457 Intangible assets with indefinite lives Spectrum licences(1) 1,833 1,833 – – $ß3,783 $ß2,376 $ß1,407 $ß1,457

(1) Accumulated amortization of spectrum licences is amortization recorded prior to 2002 and the transitional impairment amount.

166 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 23

Estimated aggregate amortization expense for intangible assets The Company must make significant estimates in respect of the subject to amortization, calculated upon such assets held as at composition of its deferred income tax asset and deferred income tax December 31, 2010, for each of the next five fiscal years is as follows: liability. The operations of the Company are complex, and related tax

Years ending December 31 (millions) interpretations, regulations and legislation are continually changing. As a result, there are usually some tax matters in question. Temporary 2 011 $ß424 differences comprising the deferred income tax liability are estimated 2012 304 as follows: 2013 139 2014 89 As at December 31 (millions) 2010 2009 2015 76 Property, plant and equipment and intangible assets subject to amortization $ (639) $ (583) (d) Goodwill Intangible assets with indefinite lives (835) (789) Merger of BC TELECOM and TELUS: Under the purchase method Partnership income unallocated of accounting, TELUS’ assets and liabilities at acquisition (see (a)) have for income tax purposes (398) (437) Net pension and share-based been recorded at their fair values with the excess purchase price being compensation amounts 22 43 allocated to goodwill in the amount of $403 million. Commencing Reserves not currently deductible 70 124 January 1, 2002, rather than being systematically amortized, the carrying Losses available to be carried forward 35 40 value of goodwill is periodically tested for impairment. Other (27) (15) Additional goodwill on Clearnet purchase: Under U.S. GAAP, shares $ß(1,772) $ß(1,617) issued by the acquirer to effect an acquisition are measured at the date the acquisition was announced; however, under Canadian GAAP, at the Deferred income tax liability time the transaction took place, shares issued to effect an acquisition Current $ (348) $ (294) Non-current (1,424) (1,323) were measured at the transaction date. This results in the purchase price under U.S. GAAP being $131 million higher than under Canadian GAAP. Deferred income tax asset (liability) $ß(1,772) $ß(1,617) The resulting difference is assigned to goodwill. Commencing January 1, 2002, rather than being systematically amortized, the carrying value of Effective January 1, 2007, the Company adopted the method of goodwill is periodically tested for impairment. accounting for uncertain income tax positions prescribed by Financial Accounting Standards Board Accounting Standards Codification (e) Income taxes topic 740, Income Taxes. This topic is intended to standardize accounting practice for the recognition, derecognition and measurement of tax Years ended December 31 (millions) 2009 2010 benefits to enable consistency and comparability among reporting entities Current $ß115 $ß286 for the reporting of income tax assets and liabilities. No consequential Deferred 187 (112) adjustments were required in the Company’s financial statements 302 174 as a result of that adoption. Investment Tax Credits (5) (15) The total amount of unrecognized tax benefits, excluding net $ß297 $ß159 capital losses, that, if recognized, would affect the effective tax rate at December 31, 2010, is $230 million (2009 – $258 million). Unrecognized The Company’s income tax expense, for U.S. GAAP purposes, differs tax benefits related to net capital losses, if recognized, amount to $NIL from that calculated by applying statutory rates for the following reasons: (2009 – $156 million), none of which would have affected the effective tax rate for the years ended December 31, 2010 or 2009. Years ended December 31 ($ in millions) 2010 2009 The gross amount of unrecognized tax benefits is calculated as Basic blended federal and the undiscounted cumulative impact of such positions on taxable income provincial tax at statutory before timing-related reversals that have yet to be realized and before income tax rates $ß366 29.0% $ß331 30.3% the application of losses carried forward, including taxable income for Revaluation of deferred income partnerships that will be allocated in the next twelve months, multiplied tax liability to reflect future by the applicable tax rate for the estimated period when such benefit statutory income tax rates (40) (97) will be realized. Tax rate differential on, and consequential adjustments from, reassessment of prior year tax issues (36) (68) Share option award compensation 10 4 Investment Tax Credits, net of tax (4) (10) Other 1 (1) U.S. GAAP income tax expense $ß297 23.6% $ß159 14.7%

TELUS 2010 annual report . 167 Years ended December 31 2010 2009

Unrecognized tax benefits Unrecognized tax benefits

Component Component sheltered by Component sheltered by Component losses carried comprised of losses carried comprised of (millions) Gross forward capital losses Gross forward capital losses

Balance, beginning of period $ß800 $ß35 $ß156 $ß867 $ß310 $ß156 Tax positions related to prior years Additions for tax returns filed during the year, less prior year estimates 16 – – 11 – – 816 35 156 878 310 156 Tax positions related to prior years Reduction for timing items deductible in the year (40) – – (47) (47) – Positions abandoned (156) – (156) – – – Other changes in estimates 2 – – 7 – – Tax positions related to current year Estimated additions 31 – – 35 30 – Reductions – – – – – – Settlements (84) – – (67) – – Current period reduction in losses (4) (7) – (2) (258) – Lapses in statutes of limitations – – – (1) – – Adjustments for tax rate changes (3) – – (3) – – Balance, end of period $ß562 $ß28 $ß – $ß800 $ß 35 $ß156

Included in the balance at December 31, 2010 and 2009, excluding As at December 31, 2010, it is reasonably possible that the Company’s net capital losses, are tax positions for which the ultimate deductibility is net unrecognized tax benefits will significantly increase and decrease in highly certain but for which there is uncertainty about the timing of such the next twelve months for the following items: deductibility. In addition, the Company has losses carried forward that . It is expected that Notices of Reassessment will be issued and/ are available to be applied against unrecognized tax benefits. As a result, or settlements will be reached with various government authorities the impact on the annual effective tax rate is significantly less than the over the next twelve months that are expected to effectively settle a gross amount of gross unrecognized tax benefits noted above. number of uncertain tax positions and result in adjustments to the The gross reserves are adjusted for tax rate changes applicable effective tax rate and gross unrecognized tax benefits including the to current and future taxation years based on the expected timing of abandonment of any remaining unrecognized tax benefits. Certain loss utilization. presently unrecognized tax benefits pertain to a number of items In the application of both Canadian GAAP and U.S. GAAP, the involving uncertainty as to the exact taxation period tax deductions Company accrues for interest charges on current tax liabilities that have may be claimed among periods of changing statutory tax rates. not been funded, which would include interest and penalties arising It is estimated the gross amount of the unrecognized tax benefits that from uncertain tax positions. The Company includes such charges as a are expected to be resolved ranges from $65 million to $85 million component of Financing costs. During the year ended December 31, 2010, (2009 – $115 million to $135 million). the Company recorded interest income of $2 million (2009 – $46 million) . It is anticipated that the Company will commence litigation pro- in respect of income taxes, recorded interest expense of $NIL (2009 – ceedings in 2011 with respect to certain unrecognized tax benefits $NIL) and collected $2 million (2009 – $54 million) of interest receivable. with gross amounts expected to be resolved or abandoned As at December 31, 2010, the Company had a balance of $5 million ultimately within a range of $60 million to $190 million. for accrued interest payable (2009 - $5 million) in respect of differences . For those items that are timing in nature, it is reasonably possible between when tax-related exposures have been funded compared that the gross unrecognized tax benefits will decrease by $15 million to when tax-related exposures may have come into existence. to $25 million (2009 – $15 million to $25 million) as temporary differences are drawn down. . During the next twelve months, the Company will file tax returns covering the period ended December 31, 2010, as required by statute. The returns are likely to contain unrecognized tax benefits that are different than what has been quantified above. As the positions will only be finalized at the time the tax returns are prepared, the amount of such benefits cannot be estimated with certainty prior to that time.

168 . TELUS 2010 annual report FINANCIAL STATEMENTS & NOTES: 23

As at December 31, 2010, income tax returns, whether filed or not, pertaining to taxation years that remain open to examination by major jurisdictions are as follows:

As at December 31 2010 2009

Restricted to appeals Other Restricted to appeals Other

Canada – Federal 1999–2001, 2003 2002, 2004–2010 1999–2001, 2003 2002, 2004–2009 Canada – provincial 1999–2001 2002–2010 1999–2001 2002–2009 United States n.a. 2006–2010 n.a. 2006–2009

(f) Comprehensive income (loss) Comprehensive income, which incorporates net income, includes all U.S. GAAP requires that a statement of comprehensive income be changes in equity during a period except those resulting from invest- displayed with the same prominence as other financial statements. ments by and distributions to owners.

Years ended December 31 2010 2009

Canadian Canadian GAAP other Pension U.S. GAAP other GAAP other Pension U.S. GAAP other comprehensive and other comprehensive comprehensive and other comprehensive (millions) income (loss) benefit plans income (loss) income (loss) benefit plans income (loss)

Amount arising $ 74 $ß(198) $ß(124) $ 87 $ß(593) $ß(506) Income tax expense 20 (54) (34) 29 (154) (125) Net 54 (144) (90) 58 (439) (381) Accumulated other comprehensive income (loss), beginning of period (72) (829) (901) (130) (390) (520) Accumulated other comprehensive income (loss), end of period $ß(18) $ß(973) $ß(991) $ß(72) $ß(829) $ß(901)

The closing accumulated other comprehensive income amounts in respect of components of net periodic benefit costs not yet recognized, and the amounts expected to be recognized in fiscal 2011, are as follows:

As at December 31 2010 2009

Amounts Accumulated other Accumulated other expected to comprehensive income amounts comprehensive income amounts be recognized (millions) Gross Tax effect Net in 2011 Gross Tax effect Net

Pension benefit plans Unamortized net actuarial loss (gain) $ß1,726 $ß468 $ß1,258 $ß 99 $ß1,528 $ß417 $ß1,111 Unamortized past service costs 27 9 18 4 31 10 21 Unamortized business combination difference (419) (114) (305) – (418) (116) (302) 1,334 363 971 103 1,141 311 830 Other benefit plans Unamortized net actuarial loss (gain) 4 1 3 – (1) – (1) $ß1,338 $ß364 $ 974 $ß103 $ß1,140 $ß311 $ 829

(g) Accounting policy developments No. 140 and No. 167, Amendments to FASB Interpretation No. 46(R). Accounting for transfers of financial assets and consolidation of variable Earlier application was prohibited. The Company’s current accounting interest entities: Under U.S. GAAP, for interim and annual reporting policies and practices are not affected by the provisions of these topics. effective with its 2010 fiscal year, the Company is required to comply with Recently issued accounting standards not yet implemented: amended standards in respect of transfers of financial assets and vari- As would affect the Company, there are no U.S. accounting standards able interest entities, as prescribed by Financial Accounting Standards currently issued and not yet implemented that would differ from Canadian Board Statement of Financial Accounting Standards No. 166, Accounting accounting standards currently issued and not yet implemented. for Transfers of Financial Assets – an amendment of FASB Statement

TELUS 2010 annual report . 169 MANAGEMENT’S DISCUSSION & ANALYSIS: X

GLOSSARY

3G (third generation): Describes wireless technology that offers fastest: Canada’s fastest coast-to-coast HSPA+ wireless network high-speed packet data mobile wireless Internet access and multimedia is based on TELUS’ tests of data throughput speeds in large Canadian communications. 3G commonly refers to HSPA networks. urban centres available from national HSPA+ service providers. Internet 4G (fourth generation): As defined by the International Telecommuni- access speed provided by the network operator may vary due to cations Union, 4G is the next generation of wireless technologies, including the device being used, network congestion, distance from the cell site, HSPA+ and LTE, which offers a substantial speed improvement over HSPA. local conditions and other factors. Speed on the Internet is beyond the wireless network operator’s control and may vary with the user’s ADSL (asymmetric digital subscriber line): An IP technology configuration, Internet traffic, website server and management policies, that allows existing copper telephone lines to carry voice, data and and other factors. video at high speeds. It is asymmetric in that it uses most of the channel to transmit downstream to the user and only a small part to receive fibre network: Transmits information by light pulses along hair-thin information upstream from the user. glass fibres, making it useful for transmitting large amounts of data between computers or many simultaneous telephone conversations. ADSL2+: Provides downstream data rates of up to 19 Mbps, which enables three simultaneous video streams into a home. TELUS’ goal forbearance: Policies refraining from the regulation of telecom services, is to provide at least 15 Mbps of bandwidth to its targeted broadband allowing for greater reliance on competition and market forces. footprint. These rates can be increased further by bonding multiple GPON (gigabit-capable passive optical network): A fibre-based lines together. transmission technology that delivers data download rates of up to AWS (advanced wireless services) spectrum: AWS spectrum 2.5 Gbps and upload rates of up to 1.25 Gbps. in the 1.7 and 2.1 GHz ranges that are expected to be utilized in North GPS (global positioning system): A radio navigation system that America for 4G services. allows users to determine and communicate their exact location, from bandwidth: The difference between the top and bottom limiting anywhere in the world. frequencies of a continuous frequency band, or indicator of the information- GSM (global system for mobile communication): A digital PCS carrying capacity of a channel. A greater bandwidth provides a greater mobile phone standard used in many parts of the world. information-carrying capacity. hosting: The management of data, which incorporates the business bits per second (bps): A measurement of data transmission of housing, serving and maintaining files for one or more websites. speed for the amount of data transferred in a second between two hotspot: A Wi-Fi wireless access point in a public place. telecommunications points or within a network. Kbps (kilobits per HSPA+ (high-speed packet access): A 4G technology capable second) is thousands of bits per second; Mbps (megabits per second) of delivering advanced wireless data download speeds. HSPA+ network is millions; and Gbps (gigabits per second) is billions. technology is currently capable of delivering manufacturer-rated wireless broadband: Used to refer to communications services that allow high- data download speeds of up to 21 Mbps and upload speeds of up speed transmission of voice, data and video simultaneously at rates of to 5.8 Mbps. 1.5 Mbps and above. HSPA+ dual-cell technology: A 4G technology that uses advanced CDMA (code division multiple access): A wireless technology multiplexing techniques to combine two wireless data carriers, each that spreads a signal over a frequency band that is larger than the signal capable of delivering download speeds of up to 21 Mbps, into a single to enable the use of a common band by many users and to achieve carrier with manufacturer-rated download speeds of up to 42 Mbps signal security and privacy. and upload speeds of up to 5.8 Mbps. cloud computing: Allows software, data and services to reside in data iDEN (integrated digital enhanced network): A network centres that are accessed over the Internet from any connected device. technology developed by Motorola to utilize 800 MHz channels for digital CRTC (Canadian Radio-television and Telecommunications service. The digital signals offer greatly enhanced spectrum efficiency Commission): The federal regulator for radio and television broadcasters, and system capacity. TELUS uses this technology for its Mike service, and cable-TV and telecommunications companies in Canada. which also includes PTT service. digital: A transmission method employing a sequence of discrete, ILEC (incumbent local exchange carrier): An established distinct pulses that represent the binary digits 0 and 1 to indicate telecommunications company providing local telephone service. specific information, in contrast to the continuous signal of analogue. IP (Internet protocol): A packet-based protocol for delivering data Digital networks provide improved clarity, capacity, features and across networks. privacy compared to analogue systems. IP-based network: A network designed using IP and QoS (quality EVDO (evolution data optimized): Part of the CDMA family of of service) technology to reliably and efficiently support all types standards, EVDO is wireless radio broadband protocol that delivers of customer traffic including voice, data and video. An IP-based data download rates of up to 2.4 Mbps. EVDO Rev A increases network enables a variety of IP devices and advanced applications data download rates up to 3.1 Mbps and upload rates up to 1.8 Mbps to communicate over a single common network. and adds higher system capacity, as well as improved quality of service support for data packet applications.

170 . TELUS 2010 annual report MANAGEMENT’S DISCUSSION & ANALYSIS:GLOSSARY X

IP TV (Internet protocol television): Television service that uses a smartphone: An advanced mobile device or personal digital assistant two-way digital broadcast signal sent through a switched telephone or (PDA) that provides text messaging, email, multimedia downloads other network by way of streamed broadband connection to a dedicated and social networking (e.g. Facebook Mobile) functionality in addition set-top box. The TELUS service is trademarked as Optik TV. to voice. TELUS includes in this category iPhone, BlackBerry and local loop: The transmission path between the telecommunications PDA devices. network and a customer’s terminal equipment. SMS (short messaging service): A wireless messaging service LTE (long-term evolution): A 4G mobile communications technology, that permits the transmission of a short text message from and/or capable of wireless broadband speeds of up to 100 Mbps, that has to a digital wireless device. emerged as a leading global wireless industry standard. spectrum: The range of electromagnetic radio frequencies used in MDU (multiple dwelling unit): An apartment or condominium. the transmission of sound, data and video. The capacity of a wireless network is in part a function of the amount of spectrum licensed and MMS (multimedia messaging service): Allows wireless customers utilized by the carrier. to send and receive messages that contain formatted text, graphics, photographs, and audio and video clips. VDSL2 (very high bit-rate digital subscriber line 2): The next generation of fibre to the node technology offering accelerated data MVNO (mobile virtual network operator): A mobile service operator download rates of up to 30 Mbps, which enables four simultaneous without licensed spectrum or network that leases wireless capacity from video streams into a home. These rates can be increased further other carriers to resell to end customers. by bonding multiple lines together. non-ILEC (non-incumbent local exchange carrier): The VoIP (voice over Internet protocol): The transmission of voice telecommunications operations of TELUS outside its traditional ILEC signals over the Internet or IP network. operating territories, where TELUS competes with the incumbent telephone company (e.g. Ontario and Quebec). VPN (virtual private network): A private data network that makes use of a public telecommunications infrastructure, maintaining privacy OTT (over-the-top): Content, services and applications in a video through the use of a private secure network and security procedures. environment where the delivery occurs over an alternative means than the main video delivery infrastructure (e.g. Netflix and YouTube). Wi-Fi (wireless fidelity): The commercial name for networking technology that allows any user with a Wi-Fi-enabled device to connect PCS (personal communications services): Digital wireless voice, to a wireless access point (e.g. hotspot). data and text messaging services in the 1.9 GHz frequency range. WiMax: A standards-based wireless technology that provides high penetration: The degree, expressed as a percentage, to which a throughput broadband connections over long distances. Currently, product or service has been sold into or adopted by a base of potential WiMax in Canada is licensed for fixed rather than mobile service in customers in a given geographic area or market segment. the 2.5 GHz spectrum band. POP: One person living in a populated area that is included in a network’s coverage area. postpaid: A conventional method of payment for wireless service FINANCIAL DEFINITIONS where a subscriber is billed and pays for a significant portion of services and usage in arrears, after consuming the services. See Section 11 of Management’s discussion and analysis for: prepaid: A method of payment for wireless service that allows a subscriber to prepay for a set amount of airtime and/or text messaging . ARPU (average revenue per subscriber unit per month) in advance of actual usage. . churn per month PTT (Push to Talk): A two-way communication service that works like . cost of acquisition (COA) a walkie-talkie using a button switch. With PTT, communication can only . COA per gross subscriber addition travel in one direction at any given moment. PTT is provided by TELUS . dividend payout ratio through its Mike service using iDEN technology. . EBITDA (earnings before interest, taxes, depreciation A service offered by wireless network operators that allows roaming: and amortization) subscribers to use their mobile phones while in the service area of . EBITDA excluding restructuring costs another operator. . EBITDA excluding restructuring costs interest coverage set-top box: A device that connects to a television and converts a signal into content that is displayed by the television. In IP TV, a set-top . earnings coverage box allows two-way communications on the IP network. . free cash flow SIM (subscriber identification module) card: A small electronic . net debt chip used to identify a particular wireless subscriber on the network as . net debt to EBITDA excluding restructuring costs a legitimate user. Subscribers can switch between devices and carrier . net debt to total capitalization networks by removing the SIM card and inserting it into another unlocked . net interest cost mobile device. The SIM card can store personal information, phone numbers, text messages and other data. . retention spend to network revenue . total capitalization − book value

TELUS 2010 annual report . 171 INVESTOR INFORMATION

Stock exchanges and TELUS trading symbols Dividend developments The quarterly dividend for January and April 2011 is 52.5 cents Toronto Stock Exchange (TSX) or $2.10 on an annualized basis. With two dividend increases in Common shares T 2010, TELUS has increased its dividend seven times over the last Non-voting shares T.A seven years. New York Stock Exchange (NYSE) In May 2010, TELUS increased its long-term dividend payout Non-voting shares TU ratio guideline to 55 to 65% of prospective sustainable net earnings. The guideline provides investors with greater clarity and is a framework Member of to assess the potential for future dividend increases. . S&P/TSX Composite Index . S&P/TSX 60 Index TELUS advises that, unless noted otherwise on our website, all . S&P/TSX Telecom Index . MSCI World Telecom Index common and non-voting share quarterly dividends paid since July 2007 . Jantzi Social Index . FTSE4Good Index are eligible dividends as defined by subsection 89(1) of the Income . Dow Jones Sustainability Index (DJSI) North American Tax Act. Under this legislation, Canadian residents may be entitled to enhanced dividend tax credits that reduce the income tax other- ESTIMATED SHARE ESTIMATED INSTITUTIONAL wise payable. OWNERSHIP BY REGION1 SHARE OWNERSHIP BY INVESTMENT STYLE1 TOTAL DIVIDENDS TO SHAREHOLDERS ($ millions) 4% 5% 5% 5% 16% 41% 10 642 9% 09 601

08 584 35% 07 521 80% 06 412 Canada Value Growth Index United States Growth at a reasonable Yield Fourth quarter dividends shown in declaration year. 2010 includes dividend payment Other price (GARP) Other on January 4, 2011.

1 Common and non-voting share ownership. Dividend reinvestment and share purchase plan Share facts You can take advantage of automatic dividend reinvestment to acquire . Common and non-voting shares receive the same dividend additional shares without fees. With this feature, eligible shareholders can . Common and non-voting shares have the same rights and privileges, have their dividends reinvested automatically into additional non-voting with the exception of voting rights shares acquired at market price. . If federal foreign ownership restrictions were removed, non-voting Effective March 1, 2011, under the dividend reinvestment plan, TELUS shares may convert on a one-for-one basis to common shares. will begin open-market purchases of TELUS non-voting shares with no discount on the purchase price of plan shares. In 2010, TELUS issued Registered shareholders1 non-voting shares from treasury at a 3% discount from the average 2010 2009 market price. TELUS common 31,587 32,546 Under the share purchase feature, eligible shareholders can, on a TELUS non-voting 28,012 28,549 monthly basis, buy TELUS non-voting shares (maximum $20,000 per 1 The Canadian Depository for Securities (CDS) represents one registration and holds calendar year and minimum $100 per transaction) at market price securities for many institutions. At the end of 2010, it was estimated that TELUS without brokerage commissions or service charges. Non-voting shares had more than 190,000 non-registered shareholders combined in the two classes acquired through optional cash payments will also change from treasury of shares. issuance to open-market purchase on March 1, 2011. Ownership at December 31, 2010 Number of shares held % of total TELUS Employee Share Plan 8,463,019 2.6% Visit telus.com/drisp or contact Common shares widely held 166,602,444 51.7% Computershare for information and Non-voting shares widely held 147,298,669 45.7% enrolment forms. Total outstanding shares 322,364,132 100.0%

TELUS estimates that approximately 70% of its shares are held by institutional investors and 30% by retail investors.

172 . TELUS 2010 annual report INVESTOR INFORMATION

2011 expected dividend1 and earnings release dates

Ex-dividend dates2 Dividend record dates Dividend payment dates Earnings release dates Quarter 1 March 9 March 11 April 1 May 5 Quarter 2 June 8 June 10 July 4 August 5 Quarter 3 September 7 September 9 October 3 November 4 Quarter 4 December 7 December 9 January 3, 2012 February 10, 2012 1 Dividends are subject to Board of Directors’ approval. 2 Shares purchased on this date forward will not be entitled to the dividend payable on the corresponding dividend payment date.

Per-share data 2010 2009 2008 2007 2006 2005 2004 2003 Basic earnings1 $ß 3.23 $ß 3.14 $ß 3.52 $ß 3.79 $ß 3.33 $ß 2.01 $ß 1.63 $ß 0.97 Dividends declared1 $ß 2.00 $ß 1.90 $ß1.825 $ß1.575 $ß 1.20 $ß0.875 $ß 0.65 $ß 0.60 Dividend declared payout ratio 62% 61% 52% 42% 36% 44% 40% 62% Free cash flow1 $ß 2.96 $ß 1.53 $ß 1.13 $ß 4.18 $ß 4.19 $ß 3.74 $ß 3.29 $ß 2.22 Common shares Closing price $ß45.48 $ß34.11 $ß37.17 $ß49.44 $ß53.52 $ß47.86 $ß36.22 $ß25.95 Dividend yield 4.4% 5.6% 4.9% 3.2% 2.2% 1.8% 1.8% 2.3% Price to earnings ratio 14 11 11 13 16 24 22 27 Non-voting shares Closing price $ß43.25 $ß32.75 $ß34.90 $ß48.01 $ß52.03 $ß46.67 $ß34.74 $ß24.20 Dividend yield 4.6% 5.8% 5.2% 3.3% 2.3% 1.9% 1.9% 2.5% Price to earnings ratio 13 10 10 13 16 23 21 25 1 Per common and non-voting share.

Share prices and volumes

Toronto Stock Exchange

Common shares (T) 2010 2009 (C$ except volume) Year 2010 Q4 Q3 Q2 Q1 Year 2009 Q4 Q3 Q2 Q1 High 48.00 48.00 46.19 41.31 38.09 37.50 35.50 36.05 36.50 37.50 Low 32.03 44.05 39.99 36.80 32.03 29.12 31.56 29.68 29.12 30.63 Close 45.48 45.48 45.72 40.17 37.80 34.11 34.11 34.54 30.85 34.68 Volume (millions) 186.9 42.1 46.2 52.6 45.9 189.6 45.9 44.9 56.8 42.0 Dividend declared (per share) 2.00 0.525 0.50 0.50 0.475 1.90 0.475 0.475 0.475 0.475

Non-voting shares (T.A) 2010 2009 (C$ except volume) Year 2010 Q4 Q3 Q2 Q1 Year 2009 Q4 Q3 Q2 Q1 High 45.90 45.90 44.06 39.51 36.64 35.15 34.08 34.50 34.99 35.15 Low 30.90 42.02 38.40 35.42 30.90 27.41 30.42 28.65 27.41 29.18 Close 43.25 43.25 43.61 38.52 36.34 32.75 32.75 33.31 30.00 33.01 Volume (millions) 79.4 16.0 23.2 20.2 19.9 93.7 17.9 20.2 31.7 23.9 Dividend declared (per share) 2.00 0.525 0.50 0.50 0.475 1.90 0.475 0.475 0.475 0.475

New York Stock Exchange

Non-voting shares (TU) 2010 2009 (US$ except volume) Year 2010 Q4 Q3 Q2 Q1 Year 2009 Q4 Q3 Q2 Q1 High 45.72 45.72 42.95 38.32 36.09 32.39 32.39 32.05 29.29 29.74 Low 28.86 41.22 35.95 33.00 28.86 22.46 28.59 24.69 23.00 22.46 Close 43.56 43.56 42.35 36.20 35.82 31.15 31.15 31.09 25.80 26.36 Volume (millions) 33.2 6.9 8.1 10.3 7.9 39.7 7.3 6.8 11.3 14.3 Dividend declared (per share) 1.943 0.519 0.483 0.477 0.464 1.68 0.45 0.442 0.424 0.366

TELUS 2010 annual report . 173 TELUS SHARES – FIVE-YEAR DAILY CLOSING PRICES ($)

75 To ronto Stock Exchange Common (T) Non-voting (T. A) 60 New York Stock Exchange TSX (C$) Non-voting (TU)

45

NYSE (US$) 30

15

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2007 2008 2009 2010

TELUS SHARE PRICE PERFORMANCE COMPARISON ($) 150

125 $119 $95 100 $94

75 Assuming $100 invested on December 31, 2005 TELUS common shares 50 S&P/TSX Composite Index MSCI World Te lecom Index

25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2007 2008 2009 2010

TELUS Corporation notes Rate Face value Maturing LONG-TERM DEBT PRINCIPAL MATURITIES AS AT DECEMBER 31, 2010 ($ millions) U.S. dollar Notes 8.0% US$741 million June 2011 Canadian dollar Notes, Series CC 4.5% C$300 million March 2012 2025 200 Canadian dollar Notes, Series CB 5.0% C$300 million June 2013 2024 Canadian dollar Notes, Series CF 4.95% C$700 million May 2014 2023 2022 249 Canadian dollar Notes, Series CE 5.95% C$500 million April 2015 2021 175 Canadian dollar Notes, Series CD 4.95% C$700 million March 2017 2020 1,000 Canadian dollar Notes, Series CG 5.05% C$1.0 billion December 2019 2019 1,000 Canadian dollar Notes, Series CH 5.05% C$1.0 billion July 2020 2018 2017 700 For details and a complete list of notes, debentures and other publicly 2016 traded debt of the Company and the Company’s subsidiaries, refer to 2015 625 Note 18 of the Consolidated financial statements. 2014 700 2013 300 Credit rating summary 2012 404 Standard & Moody’s 2011 1,142 Poor’s Rating Investors Fitch As of December 31, 2010 DBRS Ltd. Services Service Ratings Includes all debt of the Company and its subsidiaries including TELUS Corporation notes, TCI debentures, commercial paper and capital leases. Maturities in 2011 TELUS Corporation include the derivative liability associated with U.S. dollar Notes, at exchange rates Notes A (low) BBB+ Baa1 BBB+ in effect on December 31, 2010. Commercial paper R-1 (low) – – – TELUS Communications Inc. Debentures A (low) BBB+ – BBB+ Medium-term notes A (low) BBB+ – BBB+ Trend or outlook Stable Stable Stable Stable

174 . TELUS 2010 annual report INVESTOR INFORMATION

Investor relations activities Information for security holders outside of Canada Cash dividends paid to shareholders resident in countries with which 2010 conferences and meetings Canada has an income tax convention are usually subject to Canadian . Conference calls with webcast – four quarterly earnings calls and non-resident withholding tax of 15%. If you have any questions, contact one 2011 targets call Computershare. For individual investors who are U.S. citizens and/or . Annual and special meeting with webcast U.S. residents, quarterly dividends paid on TELUS Corporation common . Three conference presentations – two in Canada and one in the and non-voting shares are considered qualified dividends under the United States – two were webcast for easy access for shareholders Internal Revenue Code and may be eligible for special U.S. tax treatment. . Meetings with 204 investors – 151 in Canada, including calls using Cisco Telepresence, a high-definition video-conferencing service, Reservation system – non-Canadian common shares and 14 Optik TV demonstrations. Under federal legislation, total non-Canadian ownership of common 2010 key investment events shares of Canadian telecommunications companies, including TELUS,

. In June, TELUS launched the Optik brand, bringing together TELUS’ is limited to 331⁄3%. A reservation system controls this level. This system most advanced home services – Optik TV, powered by Microsoft requires non-Canadian purchasers of common shares to obtain a reser- Mediaroom, and Optik High Speed, offering Internet access speeds vation number from Computershare by contacting the Reservations Unit of up to 25 megabits per second (Mbps) at 1-877-267-2236 (toll-free) or [email protected]. . In July, TELUS issued 10-year 5.05% Notes raising approximately The purchaser is notified within two hours if common shares are available C$1 billion. The proceeds were used to fund the redemption of for registration. No requests have been turned down in the past eight US$613 million of TELUS’ outstanding 8% U.S. dollar 2011 Notes years. There are no ownership restrictions on non-voting shares. and to terminate associated cross-currency interest rate swaps . In August, TELUS began deploying dual-cell technology on its HSPA+ Merger and acquisitions – shareholder impact network for launch in March 2011 in select cities Emergis . In November, TELUS launched the Clear and Simple Device Upgrade TELUS completed its offer to purchase all of the outstanding common program to help consumers obtain the latest TELUS devices faster shares of Emergis Inc. for $8.25 cash per common share on January 17, without waiting for contract renewal time 2008. If you still hold share certificates for Emergis, you must tender your . Higher dividend payout ratio guideline of 55 to 65% of sustainable shares to Computershare to receive a cash payment. net earnings, on a prospective basis, was set in May . Aligned with our dividend growth model, TELUS increased the Clearnet dividend twice in 2010 to $2.10 annually or $0.525 per quarter, TELUS completed its offer to purchase all of the outstanding common which reflects a 10.5% increase from a year ago. shares of Clearnet Communications Inc. on January 12, 2001. If you still hold share certificates for Clearnet, you must tender your shares to 2010 awards Computershare to receive a cash payment. . The 2009 TELUS annual report placed sixth in the world in the Upon exchange of your Clearnet shares for TELUS non-voting Annual Report on Annual Reports, making TELUS the only company shares, you will receive dividend payments retroactive to April 1, 2001. ranked in the top 10 for seven straight years . TELUS received four awards from the Canadian Institute of Chartered BC TELECOM, TELUS and QuébecTel Accountants (CICA) for our 2009 corporate reporting package: The common shares of BC TELECOM, pre-merger TELUS Corporation . Overall Award of Excellence for Corporate Reporting and QuébecTel no longer trade on any stock exchange. If you did not . Award of Excellence for Corporate Reporting in the Communications exchange your share certificates by the expiry date of January 31, 2005 and Media sector for BC TELECOM and pre-merger TELUS Corporation, and June 1, 2006 . Honourable Mention for Excellence in Corporate Governance for QuébecTel, you ceased to have any claim against TELUS or any Disclosure entitlement relating to those shares. If you have questions regarding . Honourable Mention for Excellence in Sustainable Development unexchanged share certificates, please contact Computershare. Reporting For capital gains purposes, valuation dates and prices are as follows: . TELUS, for the second consecutive year, was named one of Canada’s Top 100 Employers for 2011 by Mediacorp Canada Price when exchanged into . TELUS was honoured with the 2010 Freeman Philanthropic Services (C$) Valuation date Price TELUS shares Award for Outstanding Corporation by the Association of Fundraising BC TELECOM December 22, 1971 6.375 6.375 Professionals BC TELECOM February 22, 1994 25.250 25.250 . TELUS was recognized by Mediacorp Canada as one of Canada’s Pre-merger TELUS February 22, 1994 16.875 21.710 Best Diversity Employers for the third consecutive year . For the second consecutive year, TELUS was included on the Global 100 Most Sustainable Corporations list in 2010 by Corporate Knights. Visit telus.com/m&a for additional Analyst coverage information on how your shareholdings As of February 2011, 17 equity analysts covered TELUS. For a detailed have been affected by various merger list, see the investor fact sheet on telus.com/investors. and acquisition transactions.

TELUS 2010 annual report . 175 e-delivery of shareholder documents We invite you to sign up for electronic delivery of TELUS information by visiting telus.com/electronicdelivery. The benefits of e-delivery include access to important company documents in a convenient, timely and environmentally friendly way that also reduces printing and mailing costs. Approximately 28,000 of our shareholders receive information by e-delivery.

Registered shareholders Registered shareholders may access company documents at telus.com or by registering online at www.computershare.com/eDelivery. If you DO NOT want to receive an annual report, you may do one of the following: .. Phone 1-800-558-0046 .. email [email protected], providing your name and account number, and indicate that you do not want to receive an annual report, or .. Visit Computershare’s website at www.computershare.com/eDelivery, download and complete the e-delivery form and mail to Computershare.

Beneficial shareholders For shareholders who hold their shares with an investment dealer or financial institution, access investordeliverycanada.com or contact your investment advisor to enrol for the convenient electronic delivery service.

Annual meeting of shareholders On Thursday, May 5, 2011, the annual meeting will be held at 11 a.m. (local time) at The Royal Conservatory located at 273 Bloor Street West, Toronto, Ontario. An Internet webcast, complete with video and audio, will be available to shareholders around the world. Shareholders unable to attend the meeting in person can vote by Internet, telephone or mail. Visit telus.com/agm for details.

If you need help with the following... contact the transfer agent and registrar .. Dividend Reinvestment and Share Purchase Plan Computershare Trust Company of Canada .. Change of address and e-delivery of shareholder documents phone 1-800-558-0046 (toll-free within North America) or .. Dividend payments or direct deposit of dividends +1 (514) 982-7129 (outside North America) .. Transfer or loss of share certificates and estate settlements email [email protected] .. Exchange of share certificates due to a merger or acquisition website computershare.com

If you need help with the following... contact TELUS Investor Relations .. Additional financial or statistical information John Wheeler .. Industry and company developments Vice-President, Investor Relations .. Latest news releases and investor presentations phone 1-800-667-4871 (toll-free within North America) or +1 (604) 643-4113 (outside North America) email [email protected] website telus.com/investors

TELUS executive office TELUS Board of Directors 555 Robson Street TELUS Corporation Vancouver, British Columbia 8th Floor, 555 Robson Street Canada V6B 3K9 Vancouver, British Columbia phone (604) 697-8044 Canada V6B 3K9 fax (604) 432-9681 Attention: Corporate Secretary email [email protected] TELUS general information British Columbia (604) 432-2151 Ethics Line Alberta (403) 530-4200 As part of our ethics policy, this hotline allows team members and others Ontario (416) 279-9000 to anonymously and confidentially raise accounting, internal controls Quebec (514) 788-8050 and ethical inquiries or complaints. phone 1-888-265-4112 Auditors website telus.ethicspoint.com Deloitte & Touche LLP

176 . TELUS 2010 annual report telus.com/investors ONLINE INNOVATION New telus.com/investors website launching in spring 2011 As part of our commitment to full and fair financial disclosure and best practices Quick links on telus.com in corporate governance, we regularly This link... takes you to update and enhance our website to meet telus.com/agm annual meeting shareholder documents the information needs of our investors. and proxy materials In 2011, we are taking this effort to a telus.com/annualreport TELUS annual report new level with the launch of a completely telus.com/bios TELUS executive team and board of directors’ redesigned Investor Relations website. biographies Based on feedback from our users, the new site will offer easy-to-use navigation, telus.com/community community investment funding enhanced search capabilities and telus.com/csr TELUS corporate social responsibility report streamlined content. It will also enable telus.com/drisp Dividend Reinvestment and Share Purchase faster updates, increased interactivity Plan details and social media capabilities. telus.com/electronicdelivery sign up for e-delivery of shareholder While our new website is in devel- documents opment, you can stay current with the telus.com/governance corporate governance site latest TELUS investor information by visiting telus.com/investors. For regular telus.com/investorcall latest webcast events and archive updates, sign up for email alerts at telus.com/quarterly latest quarterly financial documents telus.com/investors.

New to mobile barcodes? Mobile barcodes provide a quick and innovative way to get to information easily. Using your smartphone’s camera and a QR-code capable application, these barcodes will connect you directly to an Internet address, saving you from typing in the web address on your phone. Here’s how it works. Download a mobile barcode reader application to your smartphone (such as ScanLife, Google’s iPhone app or i-nigma). When you see a QR-code like the ones shown in this report, simply launch the application on your phone, follow the instructions to scan the code and you will be directly connected to the applicable information on TELUS’ website. Try it out. Use your smartphone to scan this code, which will take you directly to telus.com/investors. corporate social responsibility OUR COMMITMENT

TELUS maintains a strong commitment to corporate social responsibility (CSR) and to achieving long-term sustainable growth. Our triple bottom line approach to business balances economic growth with environmental and social goals based on a foundation of excellence in corporate governance.

Our economic commitment We are focused on building sustainable economic growth for the benefit of our investors, customers, team members, suppliers and communities.

Our environmental commitment We strive to work in an environmentally responsible manner and minimize our impact where we can.

Our social commitment We support our communities and endeavour to make a positive impact on society through our business and human resources practices.

To learn more about our innovative approach to CSR, please visit telus.com/csr.

By choosing environmentally friendly paper, we are saving: . 494 trees . 856,419 litres of wastewater . 6,230 kilograms of solid waste . 21,308 kilograms of greenhouse gases . 156 million BTUs of energy. Printed in Canada Please recycle

TELUS Corporation 555 Robson Street, Vancouver, British Columbia, Canada V6B 3K9 phone (604) 697-8044 fax (604) 432-9681 telus.com

To view this report online, scan this mobile barcode with your smartphone or visit telus.com/annualreport. New to mobile barcodes? See the inside back cover for information.

Ce rapport annuel est disponible en français en ligne à telus.com/rapportannuel.